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Federal Register / Vol. 86, No. 104 / Wednesday, June 2, 2021 / Notices 3 months of public trading in the Security, the Security has a i market capitalization of less than $1 billion, and ii an average daily volume of trading of 100,000 shares or less Initial Eligibility Criteria.

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Thinly Traded Security Criteria Thresholds The Exchange believes that the criteria of a market capitalization of less than $1 billion and an ADV of 100,000
shares or less are appropriate thresholds to determine whether a security is thinly traded. The ADV requirement is the primary indicator of whether a security is thinly traded as it helps indicate how much liquidity there is in a stock and the relative ease through which an investor may get into and out of positions in that stock. The Commission staffs OAR Report found that NMS stocks with ADV of less than 100,000 face a trading environment with less market making activity at the inside i.e., the highest bid and lowest offer or in larger order size, which may make finding a counterparty to execute a particular trade more difficult. The OAR Report also found, among other things, that NMS stocks with an ADV of less than 100,000: i Have on average, fewer exchanges quoting at the national best bid or offer NBBO; ii more volume executing away from exchange venues indicating that exchange venues are a relatively less attractive venue for executions in such securities; and iii have a smaller number of block trades than more actively traded securities.54
The Treasury Report also recommended the use of ADV as a simple approach to differentiate between liquid and illiquid stocks. 55 Accordingly, the Exchange believes that a threshold of an ADV of trading at or below 100,000 is appropriate because it would limit the Securities for which UTP is suspended only to those Securities that are in fact thinly traded and for which the Commissions OAR found concerns with respect to market quality relative to more widely-traded securities.56
The Exchange believes that it is also appropriate to set a maximum market capitalization threshold for Thinly Traded Securities to ensure that the suspension of UTP discussed below is limited to small, thinly traded companies. The Exchange believes that companies with a market capitalization 54 See
OAR Report and TM Background Paper at
greater than $1 billion may be more likely to have or soon have an ADV
above 100,000 shares. The OAR Report indicates that the median market capitalization for common stocks with an ADV between 50,000 to 100,000
shares is $313 million.57 This same figure for common stocks with an ADV
above 100,000 shares is $1.313 billion.58
Accordingly, the Exchange believes that most, if not all, stocks that have an ADV
of 100,000 shares or less will also have a market capitalization of less than $1
billion. The primary purpose of the market capitalization threshold is therefore to limit the availability of Thinly Traded Security status to smaller issuers and remove companies whose securities may soon reach an ADV of more than 100,000.
The Exchange proposes to set forth how it will calculate market capitalization in proposed Rule 25150a4. For Ongoing Eligibility Criteria, market capitalization would be determined as the product of a the number outstanding shares of the Security as reported in the most recent quarterly or annual report of the company; and b the average closing price of the Security over the preceding six 6 full calendar months. For Initial Eligibility Criteria, market capitalization would be determined as the product of a the number of outstanding shares of the Security as reported in the most recent quarterly or annual report of the company; and b the average closing price of the Security over the first three months during which the Security has been publicly traded. The Exchange believes that this is a standard method for calculating the market capitalization of a security.
Average daily volume would be measured in accordance with the terms of the proposed Rulese.g., for Ongoing Eligibility Criteria, the analysis would be the average daily share volume of trading in the Security over the preceding six months of trading to determine whether the ADV is 100,000
shares or less for four out of those six months. The Exchange believes the use of a look back of four out of the previous six months is a reasonable approach to determine whether a stock is thinly traded and is similar to other mechanisms used in Commission rules to evaluate differing regulatory treatment.59 Under this formulation, a Security could have an ADV that exceeded 100,000 shares in up to two of
2.
55 Treasury
57 OAR

56 The
Report at 60.
Exchange notes that OARs criteria used an ADV of less than 100,000 shares while the Exchange proposes to use a criteria of 100,000
shares or less. The Exchange believes that this de minimis difference is immaterial.

58 Id.

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the previous six months, but would be required to continuously meet the requirement of an ADV at or below 100,000 shares for four of the preceding six months on a rolling basis.
Thinly Traded Exchange Traded Products Importantly, the Exchange proposes to limit the availability of Thinly Traded Security status to operating companies.
This means that an ETP that is a Security would not be eligible to be considered a Thinly Traded Security even if it otherwise meets the criteria.
The Exchange proposes to exclude ETPs from eligibility because ETPs, even those with an ADV of 100,000 shares or less, do not necessarily have the same problems of a lack of liquidity as thinly traded shares of an operating company.
For example, participants in the Commissions Roundtable on Market Structure for Thinly-Traded Securities the Roundtable noted that as opposed to a corporate stock, an ETP
that is thinly traded may still be highly liquid, and that therefore the level of secondary market trading does not correlate as closely with liquidity as it does for corporate stocks. 60 Given that the purpose of the Exchanges proposal with respect to Thinly Traded Securities is to improve liquidity and market quality for small issuers, the Exchange believes that it is appropriate to exclude ETPs that, while perhaps thinly traded, do not appear to suffer from the same liquidity issues as those faced by the securities of thinly traded operating companies.
Initial and Ongoing Criteria As described above, the Exchange proposes different sets of criteria to become a Thinly Traded Security depending on how long a Security has been publicly traded. As proposed, the earliest in time that a Security could become eligible for status as a Thinly Traded Security and therefore eligible for suspension of UTP, as discussed below would be three months after the initial public offering of the Security.
The Exchange believes that every Security that undergoes an initial public offering should initially be available for UTP because there is no way to determine a priori whether or not a Security will be thinly traded. Only after there is some empirical evidence based on the first three months of public trading that a Security appears to be
Report at 4.

59 See
e.g., 17 CFR 242.301b5 regarding the triggering of fair access requirements under Regulation ATS and 17 CFR 242.1000 defining a SCI ATS with reference to the volume of its trading.

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60 Background Paper at 19. Other Roundtable participants similarly noted that . . . as a practical matter, ETPs have unlimited liquidity and an ETP
can be both thinly traded and very liquid at the same time. Id.

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