[Federal Register Volume 87, Number 228 (Tuesday, November 29, 2022)]
[Notices]
[Pages 73367-73370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96384; File No. SR-CboeBZX-2022-045]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend the Opening Auction Process Provided 
Under Rule 11.23(b)(2)(B)

November 23, 2022.
    On August 15, 2022, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the Opening Auction process provided 
under Rule 11.23(b)(2)(B). The proposed rule change was published for 
comment in the Federal Register on August 31, 2022.\3\ On October 12, 
2022, pursuant to section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\5\ The 
Commission has received no comments on the proposed rule change. This 
order institutes proceedings under section 19(b)(2)(B) of the Act \6\ 
to determine whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 95601 (Aug. 25, 
2022), 87 FR 53514 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 96038, 87 FR 63115 
(Oct. 18, 2022). The Commission designated November 29, 2022 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposed Rule Change 7
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    \7\ For a full description of all aspects of the proposed rule 
change, including BZX's justification for it, please see the Notice, 
supra note 3.
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    BZX holds an Opening Auction for each security listed on the 
Exchange. During an Opening Auction, all executions, if any, occur at a 
single price, and that price must be within a certain range established 
by the Exchange. The Exchange proposes to amend its Opening Auction 
process by, under certain circumstances, delaying the Opening Auction 
and if necessary gradually widening the bands within which the Opening 
Auction price must fall. The Exchange also proposes associated changes 
reflecting the proposed modifications to its process.\8\
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    \8\ For example, the Exchnage proposes to amend BZX Rules 
11.23(b)(1)(A) and (B), to reflect that the Opening Auction may 
occur at a time other than 9:30 a.m. It also proposes to amend BZX 
Rule 11.23(b)(1)(B) to provide that Eligible Auction Orders 
designated for the Opening Auction may not be cancelled or modified 
from 9:28 a.m. until the Opening Auction has concluded except that 
Regular Hours Only (``RHO'') limit orders designated for the Opening 
Auction may be modified, but not cancelled, from 9:28 a.m. until the 
time the Opening Auction has concluded. Any such RHO limit orders 
modified from 9:28 a.m. until the Opening Auction has concluded 
would be treated as late-limit-on-open orders.

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[[Page 73368]]

A. The Current Opening Auction Process

    Each Opening Auction price is the price level within the Collar 
Price Range \9\ that maximizes the number of shares executed between 
the Continuous Book \10\ and Auction Book \11\ in the Opening 
Auction.\12\ In the event of a volume based tie at multiple price 
levels, the Opening Auction price is 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 Opening 
Auction price is the price closest to the Volume Based Tie Breaker.\13\ 
The Volume Based Tie Breaker for an Opening Auction is the midpoint of 
the NBBO \14\ where there is a Valid NBBO; \15\ where there is no Valid 
NBBO, the Volume Based Tie Breaker is the Final Last Sale Eligible 
Trade (``FLSET'').\16\ The Exchange estimates that there is no Valid 
NBBO for approximately 5.81% of Opening Auctions.\17\
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    \9\ ``Collar Price Range'' is defined in BZX Rule 11.23(a)(6) as 
``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. The Collar Midpoint will be the 
Volume Based Tie Breaker for all applicable auctions, except for IPO 
Auctions in ETPs (as defined in Rule 11.8, Interpretation and Policy 
.02(d)(2)), for which the Collar Midpoint will be the issue price. 
Specifically, the Collar Price Range will be determined as follows: 
where the Collar Midpoint is $25.00 or less, the Collar Price Range 
shall be the range from 10% below the Collar Midpoint to 10% above 
the Collar Midpoint; where the Collar Midpoint is greater than 
$25.00 but less than or equal to $50.00, the Collar Price Range 
shall be the range from 5% below the Collar Midpoint to 5% above the 
Collar Midpoint; and where the Collar Midpoint is greater than 
$50.00, the Collar Price Range shall be the range from 3% below the 
Collar Midpoint to 3% above the Collar Midpoint.''
    \10\ ``Continuous Book'' is defined in BZX Rule 11.23(a)(7) as 
``all orders on the BZX Book that are not Eligible Auction Orders.''
    \11\ ``Auction Book'' is defined in BZX Rule 11.23(a)(1) as 
``all Eligible Auction Orders on the BZX Book.''
    \12\ See BZX Rule 11.23(b)(2)(B) (governing the determination of 
the BZX Official Opening Price).
    \13\ Volume Based Tie Breaker is defined in BZX Rule 
11.23(a)(23).
    \14\ NBBO is defined in BZX Rule 1.5(o) as ``the national best 
bid or offer.''
    \15\ Valid NBBO is defined in BZX Rule 11.23(a)(23) as an 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.'' The 
Maximum Percentage will be determined by the Exchange and will be 
published in a circular distributed to Members with reasonable 
advance notice. Id.
    \16\ FLSET is defined in BZX Rule 11.23(a)(9) as ``the last 
round lot trade occurring during Regular Trading Hours on the 
Exchange if the trade was executed within the last one second prior 
to either the Closing Auction or, for Halt Auctions, trading in the 
security being halted. Where the trade was not executed within the 
last one second, the last round lot trade reported to the 
consolidated tape received by the Exchange during Regular Trading 
Hours and, where applicable, prior to trading in the security being 
halted will be used. If there is no qualifying trade for the current 
day, the BZX Official Closing Price from the previous trading day 
will be used.''
    \17\ See Notice, supra note 3, 87 FR at 53515, n.12.
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    According to the Exchange, because the FLSET is typically based on 
the most recent execution in a security during Regular Trading 
Hours,\18\ its value may be significantly away from the Indicative 
Price \19\ at the time of the Opening Auction Process, especially in 
more thinly traded securities.\20\ The Exchange states that it: (1) has 
observed instances where auction eligible orders priced in-line with 
the Indicative Price were not executed in the Opening Auction because 
they were outside the Collar Price Range established using the FLSET; 
and (2) believes that certain of these instances resulted in orders not 
receiving executions in the Opening Auction that would have otherwise 
occurred at prices that would have been acceptable to both parties.\21\ 
To support this, BZX states that, from January 1, 2022 through July 12, 
2022, across 73,927 total Opening Auctions in BZX-listed securities, 
(1) there were 324 instances in which Market-On-Open (``MOO'') orders 
\22\ did not receive an execution in the Opening Auction and were thus 
cancelled; (2) in 168 of those instances, the Opening Auction would 
have been extended under the proposed changes to the BZX Opening 
Process; and (3) 10,936 shares could have potentially received an 
execution.\23\
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    \18\ Regular Trading Hours is defined in BZX Rule 1.5(w) as 
``the time between 9:30 a.m. and 4:00 p.m. Eastern Time.''
    \19\ Indicative Price is defined in BZX Rule 11.23(a)(10) as 
``the price at which the most shares from the Auction Book and the 
Continuous Book would match. In the event of a volume based tie at 
multiple price levels, the Indicative Price will be the price which 
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 Indicative Price will be the price closest to the Volume 
Based Tie Breaker.''
    \20\ See id. at 53515.
    \21\ See id.
    \22\ For reasons explained in the Notice, BZX uses unexecuted 
MOO orders in Opening Auctions as a proxy for crossed-interest that 
went unexecuted.
    \23\ See id. at 53519.
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B. Proposed Changes to the Opening Auction Process

    The Exchange proposes to change its Opening Auction functionality 
only in the following circumstances: where (1) there is an Indicative 
Price, (2) there is not a Valid NBBO, and (3) the Indicative Price is 
not within the FLSET-established Collar Price Range.\24\ In these 
circumstances, BZX proposes to delay the Opening Auction as follows.
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    \24\ See id. at 53516.
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    1. BZX would delay the Opening Auction for one second. If after 
that delay there is a Valid NBBO or the Indicative Price is within the 
Collar Price Range, the Opening Auction price would be established 
pursuant to the Standard Opening Auction Process.\25\ If there is no 
Valid NBBO and the Indicative Price is not within the Collar Price 
Range after the one-second delay, the Opening Auction would be delayed 
by one additional second, at which point if there is a Valid NBBO or 
the Indicative Price is within the Collar Price Range, the Opening 
Auction price would be established pursuant to the Standard Opening 
Process. If after the additional one-second delay there is no Valid 
NBBO or the Indicative Price is not within the Collar Price Range, the 
process would continue to be applied in one-second increments until 
either the Opening Auction occurs or until five seconds has lapsed 
(i.e., 9:30:05 a.m.).
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    \25\ Proposed Rule 11.23(b)(2)(B)(i) defines the ``Standard 
Opening Process,'' which mirrors the existing process described in 
Rule 11.23(b)(2)(B).
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    2. If the Opening Auction has not occurred by 9:30:05, the System 
would widen the Collar Price Range in the direction of the Indicative 
Price by 5% of the Volume Based Tie Breaker, which would be the FLSET 
as of 9:30:05 a.m. (``Widening Amount'').\26\ The System would check to 
see whether the Indicative Price is inside the widened Collar Price 
Range every second between 9:30:05 and 9:30:30 a.m.
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    \26\ The Widening Amount would be locked-in as of 9:30:05, and 
will not change between 9:30:05 and 9:34:30 even in the event that a 
round lot trade reported to the consolidated tape was received by 
the Exchange during that time (i.e., a FLSET).
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    a. If the Indicative Price is within the widened Collar Price 
Range, the Opening Auction price would be established pursuant to the 
Standard Opening Auction Process.
    b. If the Indicative Price is not within the widened Collar Price 
Range, the Opening Auction would be further delayed, as discussed 
below.
    3. If by 9:30:30 a.m. the Indicative Price is not within the 
widened Collar Price Range, the Collar Price Range would again widen by 
the Widening Amount. The System would check to see whether the 
Indicative Price is inside the widened Collar Price Range every second 
between 9:30:30 and 9:31:30 a.m.
    a. If an Indicative Price is inside the widened Collar Price Range 
during a check, the Opening Auction price would be established pursuant 
to the Standard Opening Auction Process.

[[Page 73369]]

    b. If the Indicative Price is not within the widened Collar Price 
Range, the Opening Auction would be further delayed, as discussed 
below.
    4. If by 9:31:30 a.m. the Indicative Price is not within the 
widened Collar Price Range, the System will check to see whether the 
Indicative Price is inside the widened Collar Price Range every second 
between 9:31:30 and 9:34:30 a.m.
    a. If an Indicative Price is inside the widened Collar Price Range 
during a check, the Opening Auction price would be established pursuant 
to the Standard Opening Auction Process.
    b. Unless the Opening Auction has occurred, the Collar Price Range 
would widen in the direction of the Indicative Price by the Widening 
Amount each minute from 9:31:30 to 9:34:30.
    5. If no Opening Auction has occurred by 9:34:30 a.m., the Opening 
Auction would occur pursuant to the Standard Opening Auction Process 
using the expanded Collar Price Range as of 9:34:30.
    In summary, the Opening Auction would be delayed until either: (1) 
the NBBO becomes a Valid NBBO; (2) the Indicative Price is within the 
Collar Price Range (i.e., if the Opening Auction occurred between 
9:30:01 and 9:30:05) or within the widened Collar Price Range (i.e., if 
the Opening Auction occurred between 9:30:06 and 9:34:30); (3) there no 
longer is an Indicative Price; \27\ or (4) four minutes and 30 seconds 
elapsed.
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    \27\ If after each one-second delay there is no longer an 
Indicative Price (i.e., there is no longer crossed interest), the 
Opening Auction would occur immediately pursuant to proposed Rule 
11.23(2)(B)(v), which would result in the BZX Official Opening Price 
being the FLSET, which would be the previous BZX Official Closing 
Price unless a FLSET occurred after 9:30:00.
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    BZX states that these modifications are designed to prevent the 
cancellation of auction eligible orders priced equally or more 
aggressive than the Indicative Price, which the Exchange believes would 
facilitate the presence of sufficient liquidity and information to make 
the Opening Auction a meaningful price formation event in BZX-listed 
securities.\28\
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    \28\ See id. at 53516.
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C. The BZX Official Opening Price and Limit Up Limit Down Bands

    The Exchange states that ending the Opening Auction Process at or 
before 9:34:30 a.m. would ensure that the Exchange is able to 
disseminate the BZX Official Opening Price with sufficient time to be 
used to calculate the initial limit up-limit down (``LULD'') bands, and 
that the price of executions occurring during the proposed delay price 
would provide a better foundation for the initial LULD bands.\29\
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    \29\ See id. at 53517, 53520.
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    BZX asserts that the expected benefit of allowing crossed auction 
interest to execute at the best possible price outweighs the minimal 
and finite delay (up to four minutes and 30 seconds) in the 
dissemination of the BZX Opening Price and LULD bands. BZX argues that 
this tradeoff currently exists in the national market system: the New 
York Stock Exchange LLC (``NYSE'') may delay its opening process 
indefinitely.\30\ Further, the Exchange states that the possible risks 
resulting from delaying dissemination of the LULD bands would be 
mitigated by the infrequency with which LULD halts occur within the 
first four minutes and 30 seconds of the trading day.\31\
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    \30\ See id. at 53515.
    \31\ According to the Exchange, during the period of June 1, 
2021 through May 31, 2022, a LULD halt occurred in BZX-listed 
symbols during the first four minutes and 30 seconds of the trading 
day roughly 0.01% of the time (15/134,615). See id. at 53519, 53520, 
n.38.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2022-045 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \32\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change.
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    \32\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to section 19(b)(2)(B) of the Act,\33\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
described above, the Exchange has proposed to amend the Opening Auction 
Process Provided Under Rule 11.23(b)(2)(B). In certain cases, the 
proposed Opening Auction Process would result in a delay in the 
calculation of the BZX Official Opening Price, which in most cases is 
the reference price for initial LULD price bands for BZX-listed 
securities.
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    \33\ Id.
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    The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposal with sections 6(b)(5) \34\ and 6(b)(8) \35\ of the Act. 
Section 6(b)(5) of the Act requires that the rules of a national 
securities exchange be designed, among other things, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest, and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. Section 6(b)(8) of the Act requires that the rules 
of a national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.
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    \34\ 15 U.S.C. 78f(b)(5).
    \35\ 15 U.S.C. 78f(b)(8).
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with section 6(b)(5), 6(b)(8), or any other provision of 
the Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of data, views, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\36\ 
any request for an opportunity to make an oral presentation.\37\
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    \36\ 17 CFR 240.19b-4.
    \37\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by December 20, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 3, 2023.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal and any other issues 
raised

[[Page 73370]]

by the proposed rule change under the Act. In this regard, the 
Commission seeks commenters' views regarding whether a delay in the 
calculation of the BZX Official Opening Price would affect the trading 
of BZX-listed securities or would impact any processes that rely on the 
calculation of the BZX Official Opening Price, including the 
calculation and dissemination of initial LULD price bands. The 
Commission also seeks comment on the sufficiency of the Exchange's 
quantitative support for the proposal (including any intereprations 
thereof) and whether any additional data would be useful in evaulating 
the consistency of the proposed rule change with the Act.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-CboeBZX-2022-045 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 No. SR-CboeBZX-2022-045. The 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 No. SR-CboeBZX-2022-045 and should be submitted BY 
December 20, 2022. Rebuttal comments should be submitted by January 3, 
2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Secretary.
[FR Doc. 2022-26051 Filed 11-28-22; 8:45 am]
BILLING CODE 8011-01-P