[Federal Register Volume 85, Number 150 (Tuesday, August 4, 2020)]
[Notices]
[Pages 47262-47274]
[FR Doc No: 2020-16876]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89424; File No. SR-CboeBYX-2020-021]

Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Introduce Periodic Auctions for the
Trading of U.S. Equity Securities

July 29, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on July 17, 2020, Cboe BYX Exchange, Inc. (the ``Exchange'' or
``BYX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

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

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

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

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

1. Purpose
    The purpose of the proposed rule change is to introduce periodic
auctions for the trading of U.S. equity securities (``Periodic
Auctions'').\3\ On October 17, 2019, the Commission issued a Statement
on Market Structure Innovation for Thinly Traded Securities
(``Statement'').\4\ The Statement requested comment on potential
innovations that could improve market quality in equity securities that
trade in lower volume (``thinly-traded securities''), and sought
further feedback on the regulatory changes that may be needed to
facilitate such innovation. Cboe Global Markets, Inc. (``Cboe''), the
Exchange's parent company, submitted a comment letter in response to
the Statement on December 20, 2019.\5\ As expressed in that comment
letter, Cboe shares the Commission's interest in improving market
quality in this segment of the U.S. equities market, and believes that
the best way to accomplish this goal is through innovation and targeted
approaches that invite investor choice.\6\ At that time, Cboe suggested
a handful of different approaches that national securities exchanges
could take to improve market quality in thinly-traded securities,
without requiring anti-competitive and ultimately harmful changes to
U.S. equities market structure.\7\ Following the submission of that
comment letter, Cboe has continued to work on the design of potential
market structure innovations that it could implement to improve market
quality in thinly-traded securities, consistent with the Commission's
request. As a result of those efforts, the

Exchange is now proposing to implement Periodic Auctions.
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    \3\ The term ``Periodic Auction'' shall mean an auction
conducted pursuant to Proposed Rule 11.25. See Proposed Rule
11.25(a)(4).
    \4\ See Securities Exchange Act Release No. 87327 (October 17,
2019), 84 FR 56956 (October 24, 2019) (File No. S7-18-19).
    \5\ See Letter from Adrian Griffiths, Assistant General Counsel,
Cboe to Vanessa Countryman, Secretary, Commission dated December 20,
2019, available at https://www.sec.gov/comments/s7-18-19/s71819-6574727-201085.pdf.
    \6\ Id.
    \7\ Id.
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    As proposed, Periodic Auctions of one hundred milliseconds would be
conducted throughout the course of the trading day when there are
matching buy and sell Periodic Auction Orders, as defined below, that
are available to trade in such an auction. Periodic Auctions would not
interrupt trading in the continuous market, and would be price forming
auctions that are executed at the price level that maximizes the total
number of shares in both the auction book and the continuous market
that are executed in the auction. While Periodic Auctions would be
available in all securities traded on the Exchange, the Exchange
believes that this trading mechanism would be particularly valuable for
securities that trade in lower volume and consequently suffer from
wider spreads and less liquidity displayed in the public markets. Cboe
has been a global leader in the implementation of periodic auctions,
and currently runs the largest periodic auction book for the trading of
European equities. The proposed Periodic Auctions that the Exchange
would implement are based on the model that Cboe offers to clients in
Europe, with targeted changes to adapt this model for the U.S. equities
market. The Exchange believes that its implementation of Periodic
Auctions would enhance the ability for investors to source liquidity in
both thinly-traded securities where liquidity is naturally more scarce,
as well as in more actively traded securities, including where
available liquidity may be diminished due to increased volatility or
other market conditions. Today, U.S. equities market participants are
largely limited to two significant liquidity events where orders are
pooled and executed at a single point in time--i.e., the opening and
closing auctions. During the rest of the trading day, liquidity may be
more limited, particularly for market participants that are seeking to
trade larger orders. As proposed, Periodic Auctions would offer a new
price forming auction that could be utilized by investors seeking
liquidity, including block-size liquidity, during the course of the
trading day. The Exchange believes that concentrating available
liquidity in Periodic Auctions that would take place when the Exchange
has received matching auctionable buy and sell orders would assist
investors in obtaining needed liquidity, particularly in the case of
investors seeking to execute larger orders that would be difficult to
execute without market impact in the continuous market. In addition,
since the proposed Periodic Auctions would be price forming, these
auctions would perform a valuable price discovery function, which may
be particularly helpful for investors when trading thinly-traded or
other securities that typically trade with wider spreads.
I. Order Entry and Cancellation
    The Exchange would offer Periodic Auction Only Orders and Periodic
Auction Eligible Orders,\8\ both of which indicate a member's desire to
initiate a Periodic Auction, if possible, as well as Continuous Book
Orders that would not initiate a Periodic Auction but would be eligible
to participate in such an auction when it is executed.\9\ Thus, as
provided in Proposed Rule 11.25(b), Users may enter Periodic Auction
Orders, i.e., Periodic Auction Only Orders or Periodic Auction Eligible
Orders,\10\ that are eligible to initiate Periodic Auctions pursuant to
Proposed Rule 11.25(c), as discussed later in this proposed rule
change, and Continuous Book Orders that may participate in such
Periodic Auctions if present on the Continuous Book at the time a
Periodic Auction is executed. As explained in more detail below, the
ability to choose between Periodic Auction Only Orders, Periodic
Auction Eligible Orders, and Continuous Book Orders would allow members
to control how their orders are handled in Periodic Auctions--e.g.,
whether the order is able to initiate a Periodic Auction, or not, and
whether the order participates on the Continuous Book, or not. The
choice of different methods of participating in Periodic Auctions would
therefore provide flexibility to members based on their individual
business needs, or the needs of their customers. Regardless of the type
of order submitted, orders entered on the Exchange that are present
when a Periodic Auction is executed would generally be eligible to
participate in that execution. The proposed introduction of Periodic
Auctions would therefore benefit both Users explicitly seeking to use
this functionality, as well as other Users that may benefit from any
increased liquidity routed to the Exchange in order to participate in
such Periodic Auctions.
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    \8\ A ``Periodic Auction Only Order'' is a Limit Order entered
with an instruction to participate solely in Periodic Auctions
pursuant to Proposed Rule 11.25. A ``Periodic Auction Eligible
Order'' is a Non-Displayed Limit Order eligible to trade on the
Continuous Book that is entered with an instruction to also initiate
a Periodic Auction, if possible, pursuant to Proposed Rule 11.25.
See Proposed Rule 11.25(b)(1)-(2).
    \9\ The term ``Continuous Book Order'' shall mean an order on
the BYX Book that is not a Periodic Auction Order, and the term
``Continuous Book'' shall mean System's electronic file of such
Continuous Book Orders. See Proposed Rule 11.25(a)(2).
    \10\ The term ``Periodic Auction Order'' shall mean a ``Periodic
Auction Only Order'' or ``Periodic Auction Eligible Order'' as those
terms are defined in Proposed Rules 11.25(b)(1)-(2), and the term
``Periodic Auction Book'' shall mean the System's electronic file of
such Periodic Auction Orders.. See Proposed Rule 11.25(a)(6).
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    General Requirements for Order Entry and Cancellation. Periodic
Auction Orders and Continuous Book Orders may be modified and/or
cancelled at any time, including during the Periodic Auction
Period,\11\ at the discretion of the User. Periodic Auctions are
designed to allow seamless participation in a price forming auction
process without impacting continuous trading, and market participants
would therefore remain able to manage orders that they have entered to
participate in such auctions during the course of the trading day.
Since some Users may not wish to cancel Periodic Auction Orders
inadvertently during the course of an ongoing Periodic Auction,
however, the Exchange would provide an optional instruction that would
allow such Users to instruct the Exchange not to cancel a Periodic
Auction Order during a Periodic Auction Period if it is marketable at
the Periodic Auction Book Price.\12\
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    \11\ The term ``Periodic Auction Period'' would be defined in
Proposed Rule 11.25(a)(8) as the fixed time period of 100
milliseconds for conducting a Periodic Auction.
    \12\ The Periodic Auction Book Price is an indicative price that
is designed to provide information about the price where a Periodic
Auction may ultimately be executed. See infra note 28. The
instruction to ``lock-in'' a Periodic Auction Order would be
included as a port setting that a User can use to flag any orders
entered through a particular port. Users that wish to use this
feature must use the port setting and would not be able to flag
individual orders on an order-by-order basis.
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    Given that Periodic Auctions are designed, in part, to facilitate
the sourcing of larger blocks of liquidity that may not be available in
continuous trading, the Exchange would also implement certain size
restrictions that would be applicable to Periodic Auction Orders.
Specifically, Periodic Auction Orders would have to be for a size of
100 shares or more in securities priced below $500 based on the
consolidated last sale price, i.e., the last sale price that is
disseminated by the securities information processor, or if no
consolidated last sale price is available, the previous day's closing
price.\13\ There would be no similar size restrictions for higher-
priced securities, where such a

size requirement would require a higher notional value to participate
in a Periodic Auction.
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    \13\ Periodic Auction Only Orders that do not meet applicable
size requirements would be rejected. Periodic Auction Eligible
Orders would be handled as Continuous Book Orders, and would be
eligible to trade on the Continuous Book based on User instructions.
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    Periodic Auction Only Orders. A ``Periodic Auction Only Order''
would be defined in proposed Rule 11.25(b)(1) as a Limit Order entered
with an instruction to participate solely in Periodic Auctions pursuant
to Proposed Rule 11.25. The Periodic Auction Only Order is designed for
market participants that want to access liquidity that is available in
one or more Periodic Auctions and do not wish to participate in the
continuous market. As such, a Periodic Auction Only Order would not be
eligible for execution on the Continuous Book. Instead, such orders
would remain on the Periodic Auction Book for participation in Periodic
Auctions until executed or cancelled.
    Periodic Auction Only Orders would only be accepted with a time-in-
force of Regular Hours Only (``RHO'') or immediate-or-cancel (``IOC'').
Specifically, Periodic Auction Only Orders entered outside of Regular
Trading Hours must include a time-in-force of Regular Hours Only
(``RHO'') as the Exchange would conduct Periodic Auctions only during
Regular Trading Hours,\14\ and not during the Early Trading,\15\ Pre-
Opening,\16\ or After Hours Trading Sessions.\17\ Periodic Auction Only
Orders entered during Regular Trading Hours may be either RHO or
immediate-or-cancel (``IOC''). If entered with a time-in-force of IOC,
the order must include an instruction pursuant to Proposed Rule
11.25(b) not to cancel the order during a Periodic Auction Period if it
is marketable at the Periodic Auction Book Price. As previously
discussed, with the inclusion of this instruction, an order that
initiates a Periodic Auction would be considered ``locked-in'' and
would not be cancellable by the entering User during the course of an
ongoing Periodic Auction Period unless it is not marketable at the
Periodic Auction Book Price. An IOC order entered with this instruction
would therefore be able to immediately initiate a Periodic Auction on
entry. And, if it does so, it would not be cancelled for the duration
of the Periodic Auction Period, except in circumstances where the
Periodic Auction Book Price indicates that the order might not be
executable, thereby ensuring that Periodic Auction Only Orders entered
with these attributes would ordinarily be eligible to participate in
Periodic Auctions that they initiate.
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    \14\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See BYX Rule 1.5(w).
    \15\ The term ``Early Trading Session'' means the time between
7:00 a.m. and 8:00 a.m. Eastern Time. See BYX Rule 1.5(ee).
    \16\ The term ``Pre-Opening Session'' means the time between
8:00 a.m. and 9:30 a.m. Eastern Time. See BYX Rule 1.5(r).
    \17\ The term ``After Hours Trading Session'' means the time
between 4:00 p.m. and 8:00 p.m. Eastern Time. See BYX Rule 1.5(c).
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    The Exchange believes that the Periodic Auction Only Order may be
particularly valuable for market participants that are seeking to
execute larger orders that they may not be willing expose for trading
on the Continuous Book. Thus, the Exchange would permit Users to
specify a minimum execution quantity for their Periodic Auction Only
Orders. A Periodic Auction Only Order entered with a minimum execution
quantity would be executed in a Periodic Auction only if the minimum
size specified can be executed against one or more contra-side Periodic
Auction Orders or Continuous Book Orders. The Exchange offers Minimum
Quantity Orders to Users that trade on the Continuous Book today.\18\
The proposed instruction that could be attached to a Periodic Auction
Only Order is similar to the current Minimum Quantity Orders used for
trading on the Continuous Book but would only permit the default
handling of that order type, and would not allow a member to
alternatively specify that the minimum quantity condition be satisfied
by each individual contra-side order. Periodic Auction Eligible Orders
and Continuous Book Orders entered as Minimum Quantity Orders would be
subject to similar restrictions.
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    \18\ See BYX Rule 11.9(c)(5).
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    In addition, the Exchange believes that some Users may wish to use
Periodic Auctions to seek liquidity at or better than a pegged price
that is based on the applicable national best bid and offer (``NBBO'').
The Exchange would therefore allow a User to optionally include an
instruction on its Periodic Auction Only Orders to peg such orders to
either the midpoint of the NBBO (``midpoint peg''), or the same side of
the NBBO (``primary peg''). Similar to pegging instructions offered for
Continuous Book Orders today,\19\ Periodic Auction Only Orders entered
with a primary peg instruction could be pegged to the NBB or NBO, or a
certain amount above the NBB or below the NBO (``offset'').\20\ The
inclusion of a pegging instruction for Periodic Auction Only Orders
would ensure that Users have the opportunity to specify that these
orders are only executed at prices defined in relation to the market
for the particular security, including midpoint executions that offer
price improvement compared to the applicable NBBO.
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    \19\ See BYX Rule 11.9(c)(8)(A).
    \20\ Since Periodic Auctions are restricted from trading outside
of the applicable Protected NBBO, the offset included on such orders
would have to result in the order being more aggressive than the
NBBO--i.e., priced higher for buy orders or lower for sell orders.
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    Periodic Auction Eligible Orders. A ``Periodic Auction Eligible
Order'' would be defined in Proposed Rule 11.25(b)(2) as a Non-
Displayed Limit Order eligible to trade on the Continuous Book that is
entered with an instruction to also initiate a Periodic Auction, if
possible, pursuant to Proposed Rule 11.25. The Periodic Auction
Eligible Order would allow market participants to trade in the
continuous market during the course of the trading day, with the
ability to also initiate Periodic Auctions when there is contra-side
liquidity available to trade. The Exchange notes that there may be
situations where an incoming Periodic Auction Eligible Order would be
able to either initiate a Periodic Auction, or alternatively trade
immediately with one or more orders resting on the Continuous Book.
Since Periodic Auction Eligible Orders are geared towards participation
in Periodic Auctions, with attendant price discovery benefits and
potential price improvement opportunities, an incoming Periodic Auction
Eligible Order that is eligible both to trade on the Continuous Book
and initiate a Periodic Auction would initiate a Periodic Auction. For
similar reasons, Periodic Auction Eligible Orders would not trade on
the Continuous Book during a Periodic Auction Period in the security.
Although the Exchange would not halt or otherwise suspend trading on
the Continuous Book while conducting a Periodic Auction, the Exchange
believes that Periodic Auction Eligible Orders that are designed for
use in Periodic Auctions should preference trading in such auctions
over trading on the Continuous Book.
    The time-in-force included on a Periodic Auction Eligible Order
would also need to allow the order to be entered and remain on the
Periodic Auction Book during the course of a Periodic Auction. As a
result, there would be certain limitations on the entry of Periodic
Auction Eligible Orders with a time-in-IOC or fill-or-kill (``FOK'').
An IOC order is defined in BYX Rule 11.9(b)(1) as a limit order that is
to be executed in whole or in part as soon as such order is received.
Thus, under the ordinary terms of an IOC order, if such an order were
to initiate a Periodic Auction, it would generally not be available for
later execution at

the end of any Periodic Auction Period. To ensure that IOC orders that
initiate a Periodic Auction are eligible to participate in the
auction's eventual execution, the Exchange therefore proposes that
Periodic Auction Eligible Orders entered with a time-in-force of IOC
must include an instruction pursuant to Proposed Rule 11.25(b) not to
cancel the order during a Periodic Auction Period if it is marketable
at the Periodic Auction Book Price. Such Periodic Auction Eligible
Orders would be handled in a manner consistent with that described
above with respect to Periodic Auction Only Orders. Similarly, an FOK
order is defined in BYX Rule 11.9(b)(6) as a limit order that is to be
executed in its entirety as soon as it is received and, if not so
executed, cancelled. The Exchange is not proposing to support the use
of FOK orders in Periodic Auctions, and therefore Periodic Auction
Eligible Orders would not be able to be entered with a time-in-force of
FOK.\21\
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    \21\ Although the Exchange is not proposing any special handling
for IOC or FOK orders that are entered as Continuous Book Orders,
the Exchange notes that such orders would not participate in
Periodic Auctions as they would never be posted to the Continuous
Book.
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    As previously explained, the Exchange believes that Users seeking
liquidity in Periodic Auctions may wish to use such auctions to receive
an execution at prices at or better than the midpoint of the NBBO. The
Exchange currently offers functionality that allows members entering
Mid-Point Peg Orders on the Continuous Book to forgo an execution in
situations where the NBBO is locked.\22\ However, in order to avoid a
Periodic Auction from being initiated that may not ultimately result in
an execution during a locked market, Mid-Point Peg Orders that are
entered with an instruction to not execute when the NBBO is locked
would not be eligible to be entered as Periodic Auction Eligible
Orders.\23\ This handling would mirror the handling of Periodic Auction
Orders, which as proposed could be entered with a midpoint peg
instruction, but would not include any further instructions that would
allow the User to elect not to trade during a locked market.
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    \22\ See BYX Rule 11.9(c)(9).
    \23\ This restriction would not apply to Continuous Book Orders.
Since Continuous Book Orders do not initiate Periodic Auctions, a
Continuous Book Order entered with these instructions would be able
to participate in the eventual execution of Periodic Auctions if
such execution can take place in accordance with the terms of the
order.
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    Since the Exchange believes that Periodic Auctions may be
beneficial to market participants trading larger orders that they may
not want to be executed unless a specified minimum size can be
satisfied, the Exchange would also allow for Minimum Quantity Orders to
be entered as Periodic Auction Eligible Orders. As previously
discussed, the Exchange currently offers two variants of this order
type. By default, a Minimum Quantity Order would execute upon entry
against a single order or multiple aggregated orders simultaneously.
Alternatively, such orders may be entered with an instruction that the
order not trade with multiple aggregated orders simultaneously, and
that the minimum quantity condition instead be satisfied by each
individual order resting on the Continuous Book. As proposed, Minimum
Quantity Orders, as defined in Rule 11.9(c)(5), may be entered as
Periodic Auction Eligible Orders only if the order includes the default
instruction that allows the minimum size specified to be executed
against one or more contra-side orders--i.e., similar to the proposed
handling of Periodic Auction Only Orders entered with a minimum
execution quantity instruction. Orders entered with the alternative
instruction that requires the minimum size specified to be satisfied by
each individual contra-side order would not be eligible to be entered
as Periodic Auction Eligible Orders. As discussed later in this
proposed rule change, similar restrictions would also apply to
Continuous Book Orders, which would not participate in Periodic
Auctions if entered with this alternative instruction.
    Finally, similar to the opening process used to begin trading in a
security pursuant to BYX Rule 11.23: (1) Discretionary Orders, as
defined in rule 11.9(c)(10), would be eligible to participate only up
to their ranked price for buy orders or down to their ranked price for
sell orders; \24\ and (2) all Pegged Orders and Mid-Point Peg Orders,
as defined in BYX Rule 11.9(c)(8) and (9), would be eligible for
execution in Periodic Auctions based on their pegged prices. The
Exchange believes that this proposed handling is equally relevant to
Periodic Auctions, and would ensure, where appropriate, that the order
handling experienced in such Periodic Auctions is familiar to members
and investors.
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    \24\ The discretionary range of such orders would not be
considered in Periodic Auctions.
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    Continuous Book Orders. A ``Continuous Book Order'' would be
defined in Proposed Rule 11.25(a)(2) as an order on the BYX Book that
is not a Periodic Auction Order. Continuous Book Orders, which may
participate in the eventual execution of a Periodic Auction but would
not be able to initiate such an auction, would be handled in the same
manner as Periodic Auction Eligible Orders solely with respect to
handling of (1) Discretionary Orders, and (2) Pegged Orders and Mid-
Point Peg Orders, each as discussed in the preceding paragraph.
Continuous Book Orders would also be subject to the handling discussed
for Periodic Auction Eligible Orders entered as Minimum Quantity
Orders, with the caveat that this handling would only apply to
Continuous Book Orders entered with the default instruction that
permits the execution of such orders against one or more contra-side
orders. As proposed, similar to the treatment of Periodic Auction
Orders--including both Periodic Auction Only Orders and Periodic
Auction Eligible Orders--Continuous Book Orders entered with the
alternative instruction that requires the minimum size specified to be
satisfied by each individual contra-side order would not be included in
Periodic Auctions. However, rather than prohibiting Users from entering
Minimum Quantity Orders with this instruction on the Continuous Book,
where this instruction may still be valuable for investors, the
Exchange would simply prohibit any orders entered with that instruction
from participating in the execution of any Periodic Auctions. Finally,
Continuous Book Orders that are entered as Reserve Orders, as defined
in Rule 11.9(c)(1), would be eligible to participate in Periodic
Auctions to the full extent of their displayed size and Reserve
Quantity.\25\
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    \25\ There are no similar requirements applicable to Periodic
Auction Eligible Orders since Reserve Orders include a displayed
portion and therefore would not be eligible for entry as Periodic
Auction Eligible Orders. As discussed, Periodic Auction Eligible
Orders, as defined, would include only Non-Displayed Limit Orders.
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II. Initiation and Publication of Periodic Auction Information
    The Exchange would conduct Periodic Auctions during Regular Trading
Hours to give market participants an opportunity to obtain liquidity
during the course of the trading day. Instead of initiating such
auctions on a set schedule, the Exchange would wait until it has
executable interest that is eligible to initiate a Periodic Auction,
thereby ensuring that Periodic Auctions are only performed when it may
be possible for interested market participants to obtain an execution
at the end of the Periodic Auction Period. Specifically, as provided in
Proposed Rule 11.25(c), a Periodic Auction would be initiated in

a security during Regular Trading Hours when one or more Periodic
Auction Orders to buy become executable against one or more Periodic
Auction Orders to sell pursuant to Proposed Rule 11.25. This would
begin a Periodic Auction Period of 100 milliseconds where the Exchange
would match buy and sell orders for potential execution.\26\
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    \26\ One relevant exception to this would be for Periodic
Auctions that would otherwise end after the Regular Trading Session.
As previously discussed, Periodic Auctions would only be conducted
during Regular Trading Hours. As a result, such Periodic Auctions
would be performed at the end of the Regular Trading Session.
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    Once the Periodic Auction Period has begun, the Exchange would
consolidate any additional Periodic Auction Orders that it receives,
which would be used to calculate the information disseminated at a
randomized time thereafter in a Periodic Auction Message.\27\
Specifically, at a randomized time in one millisecond intervals after a
Periodic Auction has been initiated and before the end of the Periodic
Auction, the Exchange would disseminate via electronic means a Periodic
Auction Message that includes two important pieces of information about
the Periodic Auction: (1) The Periodic Auction Book Price,\28\ and (2)
and the total number of shares of Periodic Auction Orders that are
matched at the Periodic Auction Book Price. With these two pieces of
information, market participants would be informed of both the price at
which Periodic Auction Orders would match based on current market
conditions, and the number of shares of such orders that would be
matched. The calculation of the Periodic Auction Book Price would
exclude Continuous Book Orders. Although Continuous Book Orders are
eligible to trade in a Periodic Auction at the end of the Periodic
Auction Period, they are potentially subject to execution on the
Continuous Book prior to the execution of the Periodic Auction. As a
result, similar to certain information disseminated by other national
securities exchanges in advance of their auctions,\29\ Continuous Book
Orders would not be used to calculate the data elements included in the
Periodic Auction Message. After its initial dissemination, a revised
Periodic Auction Message would be disseminated in one millisecond
intervals for the remaining duration of the auction, thereby ensuring
that market participants maintain a current view of the market with
which to make appropriate trading decisions throughout the Periodic
Auction Period.
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    \27\ The ``Periodic Auction Message'' would be defined in
Proposed Rule 11.25(a)(7) as a message disseminated by electronic
means that includes information about any matched Periodic Auction
Orders on the Periodic Auction Book, as described in Rule 11.25(c).
    \28\ The ``Periodic Auction Book Price'' would be defined in
Proposed Rule 11.25(a)(5) as the price within the Collar Price Range
at which the most shares from the Periodic Auction Book would match.
In the event of a volume-based tie at multiple price levels, the
Periodic Auction Book Price would be the price that results in the
minimum total imbalance. In the event of a volume-based tie and a
tie in minimum total imbalance at multiple price levels, the
Periodic Auction Book Price would be the price closest to the Volume
Based Tie Breaker. As calculated, the Periodic Auction Book Price
would be expressed in the minimum increment for the security unless
the midpoint of the NBBO establishes the Periodic Auction Book
Price.
    \29\ For example, the ``Current Reference Price'' disseminated
ahead of Nasdaq's closing cross is defined as the single price that
is at or within the current Nasdaq Market Center best bid and offer
at which the maximum number of shares of MOC, LOC, and IO orders can
be paired, subject to certain tie-breakers. See Nasdaq Rule
4754(a)(7)(A). Nasdaq does not include ``Close Eligible Interest''
entered on its continuous book in determining the Current Reference
Price pursuant to Nasdaq Rule 4754(a)(7)(A), nor does it include
such orders in its dissemination of the number of shares represented
by MOC, LOC, and IO orders that are paired at the Current Reference
Price. See Nasdaq Rule 4754(a)(7)(B).
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III. Determination of Periodic Auction Price
    Periodic Auctions are designed to facilitate meaningful price
discovery in securities traded on the Exchange throughout the course of
the trading day. Similar to the operation of opening and closing
auctions in securities listed on the Exchange's affiliate, Cboe BZX
Exchange, Inc. (``BZX''),\30\ as well as similar auctions conducted on
other national securities exchanges, Periodic Auctions would therefore
be executed at a price that maximizes the number of shares traded in
the auction within designated auction collars (``Collar Price
Range'').\31\ Specifically, as provided in Proposed Rule 11.25(d), the
Periodic Auction Price would be established by determining the price
level within the Collar Price Range that maximizes the number of shares
executed between the Continuous Book and Periodic Auction Book in the
Periodic Auction.\32\
---------------------------------------------------------------------------

    \30\ See BZX Rule 11.23(b)(2)(B); (c)(2)(B).
    \31\ The term ``Collar Price Range'' shall mean the more
restrictive of the Midpoint Collar Price Range, as defined in
Proposed Rule 11.25(a)(1), and the Protected NBBO. See Proposed Rule
11.25(a)(1). Notwithstanding the foregoing, if the Collar Price
Range calculated by the Exchange would be outside of the applicable
Price Bands established pursuant to the Limit Up-Limit Down Plan,
the Collar Price Range will be capped at such Price Bands. Id.
    \32\ The calculation of Collar Price Range, as defined in the
Proposed Rule, is described in more detail in Section IV of this
proposed rule change. As calculated, the Periodic Auction Price
would be expressed in the minimum increment for the security unless
the midpoint of the NBBO establishes the Periodic Auction Price.
---------------------------------------------------------------------------

    The Exchange would also implement certain ``tie-breakers'' that
would be used to determine the applicable Periodic Auction Price if
multiple price levels would satisfy the requirement to maximize the
number of shares executed in the auction. These tie-breakers would be
the same as the tie-breakers currently used for opening and closing
auctions on BZX for that exchange's listed securities. Specifically, in
the event of a volume-based tie at multiple price levels, the Periodic
Auction Price would be the price that results in the minimum total
imbalance--i.e., the price at which the number of any executable shares
to buy or sell that do not participate in the Periodic Auction is
minimized.\33\ In the event of a volume-based tie and a tie in minimum
total imbalance at multiple price levels, the Periodic Auction Price
would be the price closest to the Volume Based Tie Breaker, which would
be defined in Proposed Rule 11.25(a)(9) as the midpoint of the NBBO for
a particular security where the NBBO is a Valid NBBO.\34\
---------------------------------------------------------------------------

    \33\ Selecting a price that would minimize the imbalance best
reflects the value of the security based on the auction's price
discovery process because it is the price level where the amount of
buy and sell interest is closest to equal.
    \34\ As is the case on the Exchange's affiliate, BZX, for
opening and closing auctions for BZX-listed securities, a NBBO would
be considered a Valid NBBO where: (i) There is both a NBB and NBO
for the security; (ii) the NBBO is not crossed; and (iii) the
midpoint of the NBBO is less than the Maximum Percentage away from
both the NBB and the NBO as determined by the Exchange and published
in a circular distributed to Members with reasonable advance notice
prior to initial implementation and any change thereto. See BZX Rule
11.23(b)(23). Where the NBBO is not a Valid NBBO, the consolidated
last sale price would be used. Id.
---------------------------------------------------------------------------

IV. Determination of Collar Price Range
    As discussed, the Periodic Auction Price would be constrained by
auction collars that are designed to ensure that the execution of a
Periodic Auction takes place at a price that is reasonably related to
the market for the security. While Periodic Auctions are designed to
balance supply and demand through a competitive auction process, the
Collar Price Range would restrict trading from occurring at prices that
are far away from the market. Specifically, as proposed, the term
``Collar Price Range'' would be defined in Proposed Rule 11.25(a)(1) as
the more restrictive of the Midpoint Collar Price Range and the
Protected NBBO.\35\ The Collar Price

Range would be similar to the auction collars used today for BZX's
opening and closing processes, with important differences to account
for the fact that Periodic Auctions would be subject to the
requirements of the Rule 611 of Regulation NMS (``Order Protection
Rule'') and the Plan to Address Extraordinary Market Volatility (the
``Limit Up-Limit Down'' or ``LULD'' Plan).
---------------------------------------------------------------------------

    \35\ The term ``Midpoint Collar Price Range'' shall mean the
range from a set percentage below the Collar Midpoint (as defined
below) to above the Collar Midpoint, such set percentage being
dependent on the value of the Collar Midpoint at the time of the
auction, as described below. See Proposed Rule 11.25(a)(3). The
``Protected NBBO'' is the national best bid or offer that is a
Protected Quotation. See BYX Rule 1.5(s).
---------------------------------------------------------------------------

    Specifically, Periodic Auctions would be subject to a Collar Price
Range that is the more restrictive of the Midpoint Collar Price Range
(described below) and the Protected NBBO. This implementation would
therefore ensure that such Periodic Auctions are executed at a price
that is consistent with the requirements of the Order Protection Rule
as well as the additional protections provided by auction collars that
are similar to those currently used by the Exchanges' affiliate, BZX,
for opening and closing auctions in that exchange's listed securities.
For all Periodic Auctions, the Exchange would calculate a Midpoint
Collar Price Range to establish an upper and lower bound for the
execution of such auctions. The Midpoint Collar Price Range would
mirror the collars currently established for use in BZX auctions, and
would be defined in Proposed Rule 11.25(a)(3) as the range from a set
percentage below the Collar Midpoint to above the Collar Midpoint,\36\
such set percentage being dependent on the value of the Collar Midpoint
at the time of the auction. Specifically, the Collar Price Range would
be determined as follows: (1) Where the Collar Midpoint is $25.00 or
less, the Collar Price Range would be the range from 10% below the
Collar Midpoint to 10% above the Collar Midpoint; (2) where the Collar
Midpoint is greater than $25.00 but less than or equal to $50.00, the
Collar Price Range would be the range from 5% below the Collar Midpoint
to 5% above the Collar Midpoint; and (3) where the Collar Midpoint is
greater than $50.00, the Collar Price Range would be the range from 3%
below the Collar Midpoint to 3% above the Collar Midpoint. Finally, all
Periodic Auctions would be conducted during Regular Trading Hours and
therefore would be subject to the requirements of the LULD Plan.
Generally, the LULD Plan sets forth procedures that provide for market-
wide limit up-limit down requirements to prevent trades in individual
NMS Stocks from occurring outside of specified Price Bands. Consistent
with the requirements of the LULD Plan, the Exchange would not execute
Periodic Auctions at a price that is outside of the applicable Price
Bands. Thus, if the Collar Price Range calculated by the Exchange would
be outside of the applicable Price Bands established pursuant to the
LULD Plan, the Collar Price Range would be capped at such Price Bands.
---------------------------------------------------------------------------

    \36\ The Collar Midpoint would be the Volume Based Tie Breaker
for all Periodic Auctions. As discussed later in this proposed rule
change, the Volume Based Tie Breaker would generally be the midpoint
of the NBBO, except where there is no Valid NBBO.
---------------------------------------------------------------------------

V. Priority and Execution of Orders
    As discussed, Periodic Auction Orders and Continuous Book Orders
that are executable at the end of the Periodic Auction Period would be
executed at the Periodic Auction Price determined pursuant to Proposed
Rule 11.25(d). Such orders would be executed in accordance with
Proposed Rule 11.25(e), which describes the allocation model for
Periodic Auctions. Generally, the allocation model described in this
rule is intended to encourage active participation of Periodic Auction
Orders, including participation of larger orders, while ensuring that
Continuous Book Orders are also able to participate in resulting
executions, as appropriate, in order to encourage continued liquidity
on the Continuous Book. First, any displayed Continuous Book Orders
that are executable at the Periodic Auction Price would be executed in
price/time priority, thereby encouraging the continued submission of
displayed orders. Second, after any displayed Continuous Book Orders
have been executed, the Exchange would execute any Periodic Auction
Orders that are executable at the Periodic Auction Price. Since
Periodic Auctions are designed, in part, to facilitate the execution of
larger orders, such Periodic Auction Orders would be executed in size/
time priority, beginning with the largest order. Finally, any non-
displayed Continuous Book Orders that are executable at the Periodic
Auction Price would be executed pursuant the normal price-time priority
allocation used for the execution of orders on the Continuous Book, as
provided in BYX Rule 11.9(a)(2)(B). All Match Trade Prevention
modifiers, as defined in BYX Rule 11.9(f), would be ignored as it
relates to executions occurring during a Periodic Auction.
VI. Regulatory and Other Considerations
    The Exchange would also adopt rule language in the Interpretations
and Policies to the proposed rule that describes how Periodic Auctions
would be processed consistent with certain other regulatory
obligations, including obligations related to member conduct, or
otherwise to ensure transparent handling in certain specified
circumstances. These rules would provide additional clarity and
transparency to members and investors with respect to how the Exchange
would process Periodic Auctions consistent with relevant obligations
under the Exchange Act, or as otherwise necessary or appropriate to
maintain a fair and orderly market on the Exchange.
    First, as explained in Interpretations and Policies .01 to Proposed
Rule 11.25, the Exchange would not conduct Periodic Auctions during a
trading halt when such trading is prohibited. If a symbol is halted
prior to the execution of a Periodic Auction that has already been
initiated pursuant to Proposed Rule 11.25(c), the Periodic Auction
would be immediately cancelled without execution, consistent with
applicable limitations on trading during a halt.
    Second, as explained in Interpretations and Policies .02 to
Proposed Rule 11.25, a Periodic Auction would not be initiated during a
Crossed Market. If the market becomes crossed during a Periodic Auction
that has already been initiated pursuant to Proposed Rule 11.25(c), and
remains crossed at the end of the Periodic Auction Period, the Periodic
Auction would be cancelled without execution.\37\ If the market
subsequently becomes uncrossed, resting Periodic Auction Orders may
trigger a Periodic Auction pursuant to Rule 11.25(c).
---------------------------------------------------------------------------

    \37\ The Exchange would not immediately cancel the auction as
crossed markets are typically short-lived and the market may no
longer be crossed at the end of the Periodic Auction Period, in
which case the Exchange could successfully execute the auction.
---------------------------------------------------------------------------

    Third, Interpretations and Policies .03 to Proposed Rule 11.25
would detail the proposed handling of orders consistent with Regulation
SHO. As proposed, all short sale orders designated for participation in
the Periodic Auction would have to be identified as ``short'' or
``short exempt'' pursuant to Rule 11.10(a)(5). Rules 201(b)(1)(i) and
(ii) of Regulation SHO generally requires that trading centers such as
the Exchange establish, maintain, and enforce written policies and
procedures reasonably designed to: (i) Prevent the execution or display
of a short sale order of a covered security at a price that is less
than or equal to the current national best bid if the price of that
covered security decreases by 10% or more from the covered security's
closing price; and (ii) impose this price restriction for the remainder
of the day and the following

day. So as to maintain compliance with Rule 201 of Regulation SHO, the
Exchange would only execute short sale orders (i.e., those not marked
short exempt) if the execution would take place at a permissible price
pursuant to Regulation SHO. Specifically, if a security is in a short
sale circuit breaker, orders marked short will only trade in a Periodic
Auction if the Periodic Auction Price determined pursuant to Rule
11.25(d) is above the national best bid.\38\
---------------------------------------------------------------------------

    \38\ This restriction would not apply to orders marked short
exempt, which are exempted from these restrictions pursuant to Rule
201(b)(1)(iii)(B) of Regulation SHO. Rule 201(b)(1)(iii)(B) of
Regulation SHO provides that the policies and procedures required by
the rule must be reasonably designed to permit the execution or
display of a short sale order of a covered security marked ``short
exempt'' without regard to whether the order is at a price that is
less than or equal to the current national best bid.
---------------------------------------------------------------------------

    Finally, Interpretations and Policies .04 to Proposed Rule 11.25
would describe member conduct obligations with respect to the entry of
Periodic Auction Orders. As proposed, Periodic Auction Orders must be
entered with the intent to participate in Periodic Auctions. A pattern
or practice of submitting orders for the purpose of disrupting or
manipulating Periodic Auctions, including entering and immediately
cancelling Periodic Auction Orders, would be deemed conduct
inconsistent with just and equitable principles of trade. The Exchange
would conduct surveillance to ensure that Users do not inappropriately
enter Periodic Auction Orders for impermissible purposes, such as to
gain information about other Periodic Auction Orders that are resting
on the Periodic Auction Book, or otherwise disrupting or manipulating
Periodic Auctions.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the requirements of Section 6(b) of the Act,\39\ in general, and
Section 6(b)(5) of the Act,\40\ in particular, in that it is designed
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and not to permit unfair discrimination between
customers, issuers, brokers, or dealers. Specifically, the Exchange
believes that the proposed rule change is consistent with the
protection of investors and the public interest as it would facilitate
improved price formation and provide additional execution opportunities
for investors, particularly in thinly-traded or other securities that
may suffer from limited liquidity.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As mentioned in the purpose section of this proposed rule change,
the Exchange believes that its proposed introduction of Periodic
Auctions is responsive to the Statement that the Commission issued in
October 2019 to address market quality concerns in thinly-traded
securities.\41\ Specifically, the Periodic Auction proposal is designed
to improve liquidity and price formation in such thinly-traded
securities, while also allowing the Exchange to better compete with
off-exchange venues that currently offer features that investors may
find beneficial for sourcing liquidity when displayed liquidity in the
public markets is more scarce. Cboe offered its thoughts in response to
the Statement in a comment letter submitted to the Commission on
December 20, 2019. As stated in that comment letter, Cboe believes that
innovation by national securities exchanges, rather than potentially
harmful regulatory changes that favor a limited segment of the market,
is what is ultimately needed to facilitate better market quality in
thinly-traded securities. The Exchange believes that Periodic Auctions,
as designed, are such an innovation.
---------------------------------------------------------------------------

    \41\ See supra note 4.
---------------------------------------------------------------------------

    Periodic Auctions would supplement existing opening and closing
auctions by consolidating buy and sell interest in a price forming
auction when investors seek liquidity during the course of the trading
day. Although liquidity is frequently available in size around the open
and close of trading, liquidity may be more limited intraday. Thus,
investors looking to trade in size may have issues getting their orders
filled during the trading day, or may receive inferior execution
quality due to the market impact of trading larger blocks of equity
securities in a market with limited liquidity. As proposed, Periodic
Auctions would allow the Exchange to consolidate volume from market
participants, thereby increasing the liquidity available to investors.
By creating a deeper pool of liquidity for the intraday execution of
orders, including block-sized liquidity, the Exchange believes that
members and investors would be able to secure better quality
executions. In addition, Periodic Auctions would perform an important
price discovery function, which the Exchange believes may be
particularly valuable in thinly-traded securities that often trade with
significantly wider spreads that negatively impact the ability for
investors to ascertain market value.\42\ The proposed introduction of
Periodic Auctions would therefore contribute to a fair and orderly
market in equity securities traded on the Exchange.
---------------------------------------------------------------------------

    \42\ See Letter from Adrian Griffiths, supra note 5, which
illustrates the wider spreads that often impact trading in thinly-
traded securities. The Exchange believes that Periodic Auctions
would improve price discovery in securities that tend to trade with
wider spreads. As explained in that letter, volume in thinly-traded
securities often migrates to off-exchange venues where market
participants can trade without publicly displaying their orders and
while potentially minimizing market impact.
---------------------------------------------------------------------------

    The Exchange's affiliate, Cboe Europe, has had a successful history
with periodic auctions in the European equities market, and the
proposed introduction of Periodic Auctions for the trading of U.S.
equity securities is based, in part, on the successful implementation
of a similar product offered by Cboe Europe. As illustrated in Chart A,
Cboe Europe's periodic auction book has grown to about 2%-2.5% of
notional value traded on European equities exchanges since its
introduction in October 2015. Indeed, such periodic auctions now
account for an average daily value traded (``ADVT'') of about [euro]1
billion, with two months in Q1 2020 actually exceeding this threshold,
reflecting the value that this offering has provided to market
participants that trade European equities.
    Chart A: Average Daily Value Traded in Cboe Europe Periodic
Auctions

[GRAPHIC] [TIFF OMITTED] TN04AU20.001

                                Chart B--Cboe Europe Periodic Auction Statistics
----------------------------------------------------------------------------------------------------------------
                                                           Periodic auction value traded       Periodic auction
                                                     ----------------------------------------   market share %
                        Month                                                                   notional value
                                                         Total monthly       Average daily         traded on
                                                                                exchanges in EU
----------------------------------------------------------------------------------------------------------------
Jan-20..............................................  [euro]19,266,389,8   [euro]875,883,628                2.42
                                                                      23
Feb-20..............................................  [euro]24,377,313,4  [euro]1,218,865,67                2.52
                                                                      87                   4
Mar-20..............................................  [euro]36,933,642,0  [euro]1,678,801,91                2.46
                                                                      50                   1
Apr-20..............................................  [euro]18,370,457,3   [euro]918,522,865                2.33
                                                                      05
May-20..............................................  [euro]15,993,488,2   [euro]761,594,679                2.13
                                                                      55
Jun-20..............................................  [euro]18,221,339,8   [euro]828,242,719                1.91
                                                                      11
----------------------------------------------------------------------------------------------------------------

    This growth in Cboe Europe's periodic auction offering has promoted
price improvement opportunities, with an analysis of periodic auctions
conducted by Cboe Europe for Q1 2020 showing such periodic auctions
trading about 85% of value traded at the midpoint. Although the
Exchange recognizes that there are important differences in market
structure between the U.S. and European equities markets, as well as
relevant design differences between the two products, the Exchange
believes that U.S. investors may receive similar benefits from its
proposed introduction of Periodic Auctions. Moreover, the Exchange
believes that such innovation should take preference over other
regulatory approaches that may impede future innovation. As discussed
in detail in the paragraphs that follow, Periodic Auctions are designed
to improve the investor experience for market participants that trade
U.S. equities, and the Exchange believes that this product may
therefore contribute to a free and open market and national market
system.
    The Exchange believes that it is consistent with the protection of
investors and the public interest to introduce Periodic Auction Only
Orders and Periodic Auction Eligible Orders to facilitate trading in
the Periodic Auctions. Use of these order types would be voluntary, and
market participants would be able to determine whether and how to
participate in Periodic Auctions using these order types. Specifically,
while both forms of Periodic Auction Orders would be eligible to
initiate Periodic Auctions, Periodic Auction Only Orders would allow
firms to indicate that they are seeking liquidity solely in Periodic
Auctions, while Periodic Auction Eligible Orders would allow firms to
also seek liquidity on the Continuous Book before and after the
execution of a Periodic Auction. The Exchange believes that it is
appropriate to offer these two methods of initiating Periodic Auctions
so that market participants can decide whether to use Periodic Auctions
as the sole means of sourcing liquidity, or as an additional means of
accessing liquidity if an order entered onto the Continuous Book has
not been executed.
    Periodic Auction Only Orders would provide a means for Users to
indicate that they solely wish to have their order executed in a
Periodic Auction. Since Periodic Auctions would only take place during
the Regular Trading Session, Periodic Auction Only Orders would be
accepted with a time-in-force of RHO (either during or outside of
Regular Trading Hours), or IOC (solely during Regular Trading Hours).
If entered with a time-in-force of IOC, a Periodic Auction Only Order
would also have to be entered with an instruction to ``lock-in'' the
order to avoid situations where a Periodic Auction Only Order initiates
an auction and then is immediately cancelled prior to the execution of
that auction. Periodic Auction Only Orders are not eligible to trade on
the Continuous Book and therefore must include instructions that would
allow the order to be executed in a Periodic Auction. The requirement
to ``lock-in'' the order during the course of a Periodic Auction if the
order is marketable at the Periodic Auction Book

Price is designed to allow a User to specify that they are only
interested in participating in a Periodic Auction if they can do so
immediately, while ensuring that they are actually eligible to
participate in the execution of that auction, if possible. Without this
requirement, a Periodic Auction could be initiated even though the
order responsible for initiating that auction, by its terms, would not
be eligible to participate at the end of the Periodic Auction Period,
which would potentially be to the detriment both of the User entering
the order and any Users that submitted contra-side orders to trade with
it under the assumption that such interest was available. The Exchange
believes that the proposed requirements would benefit Users that are
looking for a speedy execution in Periodic Auctions, while also
ensuring that Periodic Auction Only Orders entered with a time-in-force
of IOC can trade at the end of the Periodic Auction Period.
    The Exchange would also allow Users to include certain specified
instructions on their Periodic Auction Only Orders. Specifically, such
orders would be accepted with minimum execution quantity and pegging
instructions. The Exchange believes that the Periodic Auction Only
Order may be particularly valuable for market participants that have
larger orders to be executed in Periodic Auctions that they may not be
willing expose for trading in the continuous market. As illustrated in
Cboe's commenter letter in response to the Commission's statement on
thinly-traded securities,\43\ liquidity is often more limited in these
securities, and as such market participants often look to off-exchange
venues that may be able to meet their liquidity needs without
displaying orders in the public market, thereby limiting the market
impact of their trading activity. The Exchange believes that market
participants that are looking for liquidity in size may find Periodic
Auctions to be a valuable means of sourcing needing liquidity without
the potential risks of displaying their orders for execution.
---------------------------------------------------------------------------

    \43\ See Letter from Adrian Griffiths, supra note 5.
---------------------------------------------------------------------------

    Given the potential benefits to larger orders, the Exchange would
permit Users to specify a minimum execution quantity for their Periodic
Auction Only Orders. A Periodic Auction Only Order entered with a
minimum execution quantity would be executed in a Periodic Auction only
if the minimum size specified can be executed against one or more
contra-side Periodic Auction Orders.\44\ The Exchange offers a Minimum
Quantity Order on the Continuous Book today. The proposed instruction
that could be attached to a Periodic Auction Only Order is similar to
the current Minimum Quantity Order but would only permit the default
handling of that order type, and would not allow a member to
alternatively specify that the minimum quantity condition be satisfied
by each individual contra-side order. Periodic Auction Eligible Orders
and Continuous Book Orders entered as Minimum Quantity Orders would be
subject to a similar restriction.
---------------------------------------------------------------------------

    \44\ The Exchange notes that in rare circumstances, the
inclusion of a minimum execution quantity on one or more Periodic
Auction Orders and/or Continuous Book Orders may result in the
Exchange being unable to process a Periodic Auction in a timely
manner. To prevent potential capacity and/or performance issues that
may impact both the execution of the auction, as well as trading on
Continuous Book, in such an event the Exchange would cancel the
auction after a specified number of attempts.
---------------------------------------------------------------------------

    In addition, in light of the fact that market participants often
value midpoint executions, or may wish to receive executions at other
prices based on the applicable national best bid or offer (``NBBO''),
the Exchange would also allow Users to enter a pegging instruction for
such orders. Periodic Auction Only Orders would therefore accommodate
instructions that the order is to be pegged to either the midpoint or
same side of the market. As is the case for orders entered for trading
on the Continuous Book, Periodic Auction Only Orders entered with a
primary peg instruction would be pegged to the NBBO, with or without an
offset, provided that only aggressive offsets would be permitted given
the fact that Periodic Auctions would be restricted to trading within
the Protected NBBO and would not be eligible to trade at inferior
prices. Although the Exchange would not generally offer special order
handling instructions for Periodic Auction Only Orders, the Exchange
believes that midpoint and primary peg instructions, as described,
would allow Users to more accurately capture their trading intent, and
may therefore promote more active use of Periodic Auctions as a means
of sourcing liquidity for such orders.
    With respect to Periodic Auction Eligible Orders, the Exchange
would allow Users to include an instruction on non-displayed orders
entered to trade on the Continuous Book that would allow such orders to
initiate a Periodic Auction if executable against contra-side Periodic
Auction Orders. The Exchange would not allow Users to enter displayed
orders as Periodic Auction Eligible Orders as such Periodic Auction
Eligible Orders would not be available for execution during an ongoing
Periodic Auction. As a result, displayed orders, which are disseminated
to the market and subject to firm quote requirements under Rule
602(b)(2) of Regulation NMS,\45\ would not be able to be entered as
Periodic Auction Eligible Orders. However, such displayed orders could
still participate in Periodic Auctions as Continuous Book Orders, and
would receive execution priority when executed in that manner.
---------------------------------------------------------------------------

    \45\ See 17 CFR 242.602(b)(2).
---------------------------------------------------------------------------

    As discussed in the purpose section of the proposed rule change,
the time-in-force included on a Periodic Auction Eligible Order would
need to allow the order to remain executable during the course of a
Periodic Auction. The Exchange has therefore proposed to: (1) Only
allow IOC orders to be entered as Periodic Auction Eligible Orders if
such orders include an instruction not to cancel the order during a
Periodic Auction Period; and (2) disallow FOK orders from being entered
as Periodic Auction Orders. The Exchange believes that both of these
requirements are consistent with just and equitable principles of trade
as they are designed to ensure that a Periodic Auction Eligible Order,
which as discussed would be eligible for the initiation of a Periodic
Auction, would not be prevented from participating in the eventual
execution of such Periodic Auction due to a time-in-force that
contemplates the order either being executed or cancelled immediately
on entry. As discussed with respect to Periodic Auction Only Orders,
without this requirement, a Periodic Auction could be initiated even
though the order responsible for initiating that auction, by its terms,
would not be eligible to participate at the end of the Periodic Auction
Period, which would potentially be to the detriment both of the User
entering the order and any Users that submitted contra-side orders to
trade with it under the assumption that such interest was available.
Nevertheless, the Exchange believes that some Users may find it
valuable to enter IOC orders as Periodic Auction Eligible Orders.
Although such Users may be looking for a speedy execution, and would
therefore generally prefer an execution on entry, or not at all, they
may be willing to wait 100 milliseconds for a potential execution in a
Periodic Auction, instead of having the order cancelled immediately.
The Exchange would therefore allow Users to signal their intent to
trade in this manner by

entering the IOC order with an instruction that it should not be
cancelled during a Periodic Auction. If entered in this manner, a
Periodic Auction Eligible Order may trade immediately on entry on the
Continuous Book, or may alternatively participate in a Periodic
Auction, subject to cancellation no later than the end of any Periodic
Auction Period. The Exchange does not anticipate the same use case for
FOK orders, which contain an additional condition that requires the
order to be executable in full, and would therefore restrict their
ability to be entered as Periodic Auction Eligible Orders.
    The Exchange would also not accept Mid-Point Peg Orders entered as
Periodic Auction Eligible Orders if the Mid-Point Peg Order is entered
with an instruction to not execute when the NBBO is locked. If the
Exchange permitted Mid-Point Peg Orders with this instruction to be
entered as Periodic Auction Eligible Orders, those orders could
initiate a Periodic Auction but would not be available for the
auction's eventual execution if the market subsequently becomes locked
at that time. The Exchange believes that the proposed handling is
consistent with just and equitable principles of trade as the Exchange
wishes to avoid the potential for such orders to initiate a Periodic
Auction that may ultimately not execute due to the inclusion of this
condition. Periodic Auction Eligible Orders are designed to initiate
Periodic Auctions and may encourage other Users to enter orders that
could participate in the auction's execution. As a result, the Exchange
believes that such orders should reflect trading interest that does not
include unnecessary conditions. Users that wish to use Mid-Point Peg
Orders with this instruction would still be eligible to participate in
Periodic Auctions as Continuous Book Orders, which are able to
participate in the eventual execution of a Periodic Auction, but would
not initiate such auctions.
    Similar to the proposed handling of Periodic Auction Only Orders,
the Exchange would allow Periodic Auction Eligible Orders to be entered
as Minimum Quantity Orders, but would only permit such orders to be
entered with the default handling of that instruction. That is, Minimum
Quantity Orders entered as Periodic Auction Eligible Orders would
execute only if the minimum size specified can be executed against one
or more contra-side Periodic Auction Orders or Continuous Book Orders.
Although the Exchange does offer an alternative instruction that
permits the User to request that the Exchange only execute the order
against a single contra-side order, such handling is designed primarily
for use on the Continuous Book, and would complicate the execution of
Periodic Auctions.\46\ For similar reasons, Minimum Quantity Orders are
excluded from the Exchange's opening process for securities traded
pursuant to unlisted trading privileges. However, as discussed, the
Exchange believes that Users participating in Periodic Auctions may
value the ability to specify a minimum quantity, and the Exchange has
therefore proposed to allow such functionality for Periodic Auction
Eligible Orders so long as the User is willing for those orders to be
executed against one or more contra-side orders. The Exchange believes
that this strikes the right balance between allowing Users to ensure
that they only trade in a Periodic Auction if their minimum quantity
criteria can be met, while excluding instructions that could
unnecessarily complicate the execution of Periodic Auctions.
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    \46\ See BYX Rule 11.23(a)(2).
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    In addition, the Exchange would specify handling for Discretionary
Orders, Pegged Orders, and Mid-Point Pegged Orders that are entered as
Periodic Auction Eligible Orders. Including this information in the
rule would increase transparency around the operation of the Exchange
and ensure that Users are properly informed about how orders with these
instructions would be handled in Periodic Auctions. The same handling
is currently applied to the Exchange's opening process for securities
traded pursuant to unlisted trading privileges, and treating these
orders in the same manner for purposes of Periodic Auctions would
ensure a consistent and familiar experience for market participants
that enter such orders on the Exchange. The Exchange therefore believes
that these proposed rules are consistent the maintenance of a fair and
orderly market.
    The Exchange also believes that it is consistent with just and
equitable principles of trade to allow Continuous Book Orders, i.e.,
orders that are not entered as either Periodic Auction Only Orders or
Periodic Auction Eligible Orders, to participate in any Periodic
Auction that results in an execution. Although Continuous Book Orders
would not initiate a Periodic Auction, such orders would be eligible to
participate in the resulting execution, thereby facilitating additional
liquidity for those orders without disrupting their ability to trade
normally during the course of the auction. Continuous Book Orders would
remain on the Continuous Book and subject to potential execution during
a Periodic Auction Period, but would be included in the final
determination of the Periodic Auction Price, and participate in any
resulting execution. Although the Exchange believes that a number of
Users may wish to use Periodic Auction Orders that are specifically
designed for participation in Periodic Auctions and have the ability to
initiate those auctions, the Exchange also believes that Periodic
Auctions would be valuable to Users that wish primarily to trade on the
Continuous Book but may be able to secure an execution in a Periodic
Auction if possible. As a result, Continuous Book Orders would
generally be eligible to trade in Periodic Auctions at the end of the
auction process.
    Such Continuous Book Orders would be subject to similar handling to
Periodic Auction Eligible Orders that may also trade on the Continuous
Book in addition to Periodic Auctions, including the same handling
discussed above with respect to Discretionary Orders, Pegged Orders,
and Mid-Point Peg Orders. The Exchange believes that this handling is
consistent with just and equitable principles of trade as it would
ensure consistent treatment of similar orders traded in Periodic
Auctions. In addition, Continuous Book Orders that are entered as
Minimum Quantity Orders would be subject to similar but not identical
handling to Periodic Auction Eligible Orders. Given the value of
Minimum Quantity Orders that include the alternative instruction that
allows a User to specify that the minimum size specified be satisfied
by each individual contra-side order, Users would continue to be able
to use this instruction for trading on the Continuous Book. However,
such orders, which would not be permitted to be entered as Periodic
Auction Orders, would similarly not be able to participate in Periodic
Auctions as Continuous Book Orders. Users that wish to include a
minimum quantity on their orders could participate in Periodic Auctions
as either Periodic Auction Only Orders, Periodic Auction Eligible
Orders, or Continuous Book Orders, provided that for each of these
order types, the order must be willing to trade against one or more
contra-side orders. As discussed, the Exchange believes that this
treatment is necessary in order to offer a minimum quantity instruction
in an auction that pools interest and executes such interest at a
single price.
    The Exchange also believes that the proposed handling of Continuous
Book

Orders entered as Reserve Orders is consistent with the maintenance of
a fair and orderly market as it will ensure a familiar and consistent
experience for market participants that trade on the Exchange. Although
Periodic Auction Eligible Orders must be non-displayed and therefore
cannot be entered as a Reserve Order that, by rule, includes both a
displayed portion and non-displayed portion, the proposed handling for
Continuous Book Orders is the same as the handling applied to the
Exchange's opening process securities traded pursuant to unlisted
trading privileges. Thus, similar to the treatment of Discretionary
Orders, Pegged Orders, and Mid-Point Peg Orders, detailing the proposed
handling of Reserve Orders would both increase operational transparency
and ensure consistent and familiar treatment of similar orders on the
Exchange.
    Periodic Auctions would be initiated throughout Regular Trading
Hours when Periodic Auction Orders entered by Users are executable
against each other, thereby ensuring that the initiation of an auction
is tied to demonstrated interest from both buyers and sellers in the
security. Once the Exchange has matched two or more Periodic Auction
Orders in this manner, a Periodic Auction Period of 100 milliseconds
would begin to allow orders from additional market participants to
participate in the execution of the Periodic Auction. To facilitate the
pooling of Periodic Auction Orders during this period, the Exchange
would publish information about the auction, including (1) an
indicative Periodic Auction Book Price that reflects price at which the
Periodic Auction could be executed, counting only Periodic Auction
Orders and excluding Continuous Book Orders that may be subject to
execution prior to the end of the Periodic Auction Period; and (2) the
total number of shares of Periodic Auction Orders that are matched at
the Periodic Auction Book Price. This information would be published
beginning at a randomized time in one millisecond intervals, and would
be refreshed in one millisecond intervals thereafter as additional
orders are entered or cancelled, or other changes to market conditions
are made that could impact the Periodic Auction Book Price. The
Exchange believes that it is consistent with the protection of
investors and the public interest to publish this information as it may
inform potential trading in periodic auctions and encourage additional
order flow to be entered to participate in such auctions. The Exchange
also believes that sending out the initial dissemination at a
randomized time after Periodic Auction Orders have been matched would
facilitate the operation of a fair and orderly market. This handling
would allow additional Periodic Auction Orders received during this
interim period to be pooled in the initial dissemination of auction
information. In addition, since market participants would not know how
much time is left in the Periodic Auction Period, firms would be
incentivized to respond quickly with Periodic Auction Orders to
participate in the Periodic Auction, rather than potentially waiting
until the end of the auction, which may reduce the value of the
information proposed to be disseminated to investors and may impact
price discovery.
    Once the 100 millisecond Periodic Auction Period has ended, the
Exchange would calculate the execution price of the auction, i.e., the
Periodic Auction Price, and execute Periodic Auction Orders and
Continuous Book Orders that are eligible to trade at that price. The
Exchange believes that the proposed methodology for determining the
Periodic Auction Price is consistent with just and equitable principles
of trade. Generally, the proposed methodology for calculating the
Periodic Auction Price is designed to allow Periodic Auctions to
facilitate price discovery while maintaining important investor
protections and assuring compliance with applicable regulations. Given
the important price formation function of these auctions, the Exchange
would use logic for pricing Periodic Auctions that largely mirrors the
logic used by its affiliate, BZX, for opening and closing auctions in
that exchange's listed securities.
    Specifically, the Exchange would seek to execute Periodic Auctions
at a price that maximizes the number of shares that can trade in the
auction, subject to specified price collars that would limit executions
at prices that are not reasonably related to the price of the security
established by the market. The applicable price collars would also be
based on the auction collars used for BZX opening and closing auctions,
except that trading would be further limited by applicable LULD Price
Bands and the Protected NBBO, as required pursuant to applicable
regulatory requirements.\47\ Finally, the price calculation would be
subject to tie-breakers that are consistent with those used for BZX
opening and closing auctions in situations where there is a volume-
based tie at multiple price levels. These tie-breakers would help
ensure the selection of a meaningful Periodic Auction Price by
selecting the price that would minimize the potential imbalance between
supply and demand, and then favoring prices closer to a Volume Based
Tie Breaker that is generally the midpoint of the NBBO. In sum, the
proposed calculation of the Periodic Auction Price would allow the
Exchange to appropriately balance supply and demand in Periodic
Auctions and facilitate robust price formation similar to opening and
closing auctions.
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    \47\ As discussed in the purpose section of this proposed rule
change, both the requirements of the LULD Plan and the Order
Protection Rule apply to transactions executed during Regular
Trading Hours. Although opening and closing auctions are generally
exempt from these requirements, there are currently no exemptions
that would apply to Periodic Auctions that perform a similar role in
facilitating price discovery.
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    After the Exchange determines the Periodic Auction Price, any
Periodic Auction Orders or Continuous Book Orders that are eligible for
execution at that price would be executed based on a special allocation
methodology designed for use in Periodic Auctions. First, in order to
continue to incentivize the entry of displayed orders on the Exchange,
Continuous Book Orders that are displayed on the Continuous Book would
be executed first in price/time priority. Although the Exchange is
proposing to introduce Periodic Auctions to incentivize additional
liquidity, the Exchange believes that it is important to continue to
encourage the entry of displayed orders on the Continuous Book.
Displayed orders entered in the public market contribute to price
formation, and are used as a reference price for the execution of
orders on other venues. As a result, the Exchange's proposal to
introduce Periodic Auctions is designed to continue to encourage the
entry of displayed orders that would both trade on the Continuous Book
and simultaneously benefit from priority when executed in a Periodic
Auction.
    Second, after Continuous Book Orders displayed on the Continuous
Book have been executed, Periodic Auction Orders would be executed in
size/time priority. As previously noted, the Exchange believes that
Periodic Auctions may be valuable for investors that are seeking
liquidity in size. As a result, the priority methodology employed by
the Exchange for Periodic Auction Orders would preference larger
orders, which the Exchange believes may contribute to greater depth in
Periodic Auctions. In turn, the liquidity provided by these larger
orders would contribute to the execution of smaller orders that may

also participate in Periodic Auctions, thereby facilitating the
execution of all orders, both large and small, that seek liquidity in
such auctions, and furthering execution opportunities for investors
that trade on the Exchange.
    Finally, non-displayed Continuous Book Orders would be executed
last in priority. Unlike displayed orders entered on the Continuous
Book, or Periodic Auction Orders that contribute to important pricing
information disseminated to market participants during the course of a
Periodic Auction, non-displayed orders entered on the Continuous Book
do not contribute to pre-execution price formation.\48\ As a result,
while these orders would be eligible to trade in Periodic Auctions,
where they may benefit from additional execution opportunities, they
would be subject to the lowest priority among Periodic Auction Orders
and Continuous Book Orders. In addition, since these orders are not
specifically seeking liquidity in Periodic Auctions, and would
participate in Periodic Auctions solely as an additional source of
liquidity, priority within this band would be determined based on the
normal execution priority afforded to such orders on the Continuous
Book. The Exchange believes that this approach is consistent with just
and equitable principles of trade as it would ensure that non-displayed
Continuous Book Orders receive the priority that they would normally be
afforded for executions on the Continuous Book.
---------------------------------------------------------------------------

    \48\ Non-displayed orders would contribute to price formation at
the end of a Periodic Auction as they would be considered in the
determination of the Periodic Auction Price.
---------------------------------------------------------------------------

    Similar to the Exchange's opening process for securities traded
pursuant to unlisted trading privileges,\49\ all Match Trade Prevention
modifiers, as defined in BYX Rule 11.9(f), would be ignored as it
relates to executions occurring during a Periodic Auction. The
Exchange's Match Trade Prevention modifiers are designed to allow Users
to better manage order flow and prevent certain undesirable executions
on the Continuous Book. However, this functionality would complicate
the execution of Periodic Auctions, where orders are pooled together
and executed at a price that balances supply and demand in the auction.
As a result, the Exchange believes that ignoring Match Trade Prevention
modifiers in Periodic Auctions, similar to the handling currently used
by the Exchange for its opening process, is consistent with the
maintenance of a fair and orderly market in securities traded in such
Periodic Auctions.
---------------------------------------------------------------------------

    \49\ See BYX Rule 11.23(b).
---------------------------------------------------------------------------

    In addition, the Exchange believes that the proposed language being
codified in the Interpretations and Policies to the proposed rule is
consistent with the Exchange Act and the rules and regulations adopted
thereunder. As proposed, these rules would include language that
identifies how Periodic Auctions would be conducted during a crossed
market, and consistent with applicable regulatory requirements related
to handling of trading halts and Regulation SHO. Such rules would also
describe appropriate standards of member conduct, consistent with the
Exchange's obligations under the Act to regulate and surveil its
market. The proposed rules included in Interpretations and Policies
.01-.03 would ensure that: (1) Periodic Auctions do not take place when
their execution may be complicated by the existence of a crossed market
that could interfere with the auction's price discovery function, or
when such execution would not be permissible due to a trading halt in a
security; \50\ and (2) the execution in Periodic Auctions of any short
sale orders that are not marked ``short exempt'' would only take place
at a permissible price when the security is in a short sale circuit
breaker pursuant to Rule 201 of Regulation SHO. Further, the proposed
rules included in Interpretations and Policies .04 would provide
additional guidance to Users with respect to conduct that would be
considered inconsistent with just and equitable principles of trade.
The Exchange intends to conduct appropriate surveillance of its members
to ensure that their participation in Periodic Auctions is done in a
manner that is consistent with such rules. As a result, these rules
would ensure that orders Periodic Auctions would be processed in a
manner that is consistent with applicable regulatory obligations and
the maintenance of a fair and orderly market in securities traded on
the Exchange.
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    \50\ Although Rule 611(b)(4) of Regulation NMS provides an
exception from the trade-through requirements of that rule for
situations where a protected bid is crossed with a protected offer,
the Exchange believes that market participants may not desire an
execution in a Periodic Auction during periods when the market is
crossed.
---------------------------------------------------------------------------

    In conclusion, the Exchange believes that the proposed rule change
would enhance the experience of investors looking to access liquidity
in the public market and fill an important role in the U.S. equities
market where liquidity may be more limited outside of the open and
close of trading. By introducing a price forming auction for the
aggregation and execution of buy and sell orders intraday, Periodic
Auctions would increase execution opportunities available to investors.
In turn, Periodic Auctions may improve trading outcomes for market
participants that have trouble sourcing liquidity in the public markets
today, including in thinly-traded securities where liquidity is often
limited and trading often occurs on a number of off-exchange venues
that can offer reduced market impact. As such, the Exchange believes
that the proposed rule change would remove impediments to and perfect
the mechanism of a free and open market.

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

    The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Rather, the proposed rule
change is designed to increase competition by introducing an additional
mechanism for equities market participants to seek liquidity during the
course of the trading day. Indeed, the proposed introduction of
Periodic Auctions is a pro-competitive means of addressing the concerns
that the Commission expressed in its Statement on thinly-traded
securities. The proposal, which seeks to introduce innovative
functionality on a non-primary listing exchange, would allow
competition, rather than regulatory intervention designed to limit
competition (e.g., through the suspension or termination of unlisted
trading privileges), to improve market quality in thinly-traded and
other securities.
    The introduction of Periodic Auctions is designed to improve
execution quality for investors sourcing liquidity during the trading
day, and, in particular, those that are looking to trade in size, or
are looking to access liquidity in thinly-traded or other securities
where liquidity may be more scarce. Providing an additional mechanism
for price forming orders to be executed would promote competition
between venues that seek to execute this order flow, and provide market
participants and investors with greater choice with respect to how they
choose to source liquidity. The equities industry is fiercely
competitive as the Exchange must compete with other equities exchanges
and off-exchange venues for order flow. The proposal is both evidence
of this competition, and would further enable the Exchange to compete
effectively in this market.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received on the proposed rule
change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-CboeBYX-2020-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBYX-2020-021. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBYX-2020-021, and should be
submitted on or before August 25, 2020.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16876 Filed 8-3-20; 8:45 am]
BILLING CODE 8011-01-P