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Federal Register / Vol. 86, No. 181 / Wednesday, September 22, 2021 / Notices have entered better-priced interest; all better-priced interest is guaranteed to participate in the Closing Auction. In addition, because DMMs would be entering Closing D Orders before the end of Core Trading Hours and such interest would be included in the Closing Auction Imbalance Information, if they are better-priced orders, the Exchange believes that should be included in the Closing Auction in the same manner that all other better-priced orders entered by other member organizations are allocated in the Closing Auction. Accordingly, DMMs would not be receiving a unique benefit as a result of this proposed allocation.
The Exchange believes that amending Rule 7.35Bh2A to provide that at-priced Closing D Orders in securities that are assigned to the DMM would be included in the DMM
Participant allocation would promote a fair and orderly Closing Auction process because it is consistent with the current allocation of at-priced DMM Interest in the Closing Auction, and therefore it is not novel. This benefit is designed to offset the DMMs significant obligation to facilitate the Closing Auction and supply liquidity as needed. The Exchange further notes that the proposed amendment would allow this at-priced DMM Participant allocation only for Closing D Orders, which, by their terms, must be entered before the end of Core Trading Hours and would be included in the Closing Auction Imbalance Information. Accordingly, this proposed allocation would be consistent with how Closing D Orders are currently allocated for Floor brokers in the Closing Auction because they would be allocated as part of the allocation of orders ranked Priority 2
Display Orders, which currently get an allocation opportunity before orders ranked Priority 3Non-Display Orders and LOC Orders. The Exchange likewise believes that the proposal that at-priced Closing D Orders entered by DMMs in securities not assigned to the DMM be included in the Book Participant would be consistent with existing Rules because in such case, the member organization entering such orders would not be functioning as a DMM, and therefore would not be eligible for a DMM Participant allocation for such orders.
The Exchange believes that amending Rule 7.35Bh2 to add new sub-paragraph E describing how DMM
Auction Liquidity would be allocated would promote a fair and orderly Closing Auction process. Specifically, because DMM Auction Liquidity could be entered only to offset Unpaired Quantity at the Closing Auction Price,
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the Exchange does not believe that such interest should get an allocation benefit.
Accordingly, DMM Auction Liquidity would be allocated after not only displayed and non-displayed orders, but also after LOC Orders and Closing IO
Orders. The Exchange further believes providing DMM Auction Liquidity with an allocation opportunity before orders ranked Priority 4Yielding Orders would be consistent with a fair and orderly market because orders with a Yielding Modifier are, by their terms, intended to yield to other available interest and not guaranteed an execution in the Closing Auction.
Because DMM Auction Liquidity would have an allocation opportunity before orders with a Yielding Modifier, the Exchange further believes it would be consistent with a fair and orderly Closing Auction process to not include offsetting Yielding Orders in the calculation of Unpaired Quantity that a DMM would be permitted to offset with DMM Auction Liquidity.
The Exchange believes that deleting the text currently set forth in Rule 7.35Bh3A and replacing it with a description of how self-trade prevention would be applied within the DMM
Participant Allocation would remove impediments to and perfect the mechanism of a free and open market and a national market system because it would promote transparency of the circumstances of when and how DMM
Interest would be decremented and cancelled to prevent a self-trade between Closing D Orders to buy sell entered by a DMM and DMM Auction Liquidity to sell buy. By applying STPD, the Exchange believes that the proposed mechanism would reduce the impact of such cancellation on the Closing Auction Price.
Exchange-Facilitated Auctions. The Exchange believes that the proposed amendment to Rule 7.35Ca1 would remove impediments to and perfect the mechanism of a free and open market and a national market system because it would allow for Closing D Orders entered by DMMs, which would be entered before the end of Core Trading Hours, to participate in an Exchangefacilitated Closing Auction. Currently, Closing D Orders entered by Floor brokers are eligible to participate in an Exchange-facilitated Closing Auction, and the Exchange believes that Closing D Orders entered by DMMs should not be processed differently.
Prohibited Transactions. The Exchange believes that the proposed changes to the Closing Auction process, combined with the elimination of Floor Broker Interest in the Closing Auction, would significantly alter the balance of
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benefits and obligations for DMMs and the resulting scope of obligations would no longer be commensurate with DMM
benefits. The Exchange therefore believes that eliminating Prohibited Transactions would remove impediments to and perfect the mechanism of a free and open market and a national system and would promote just and equitable principles of trade because, as a result of the proposed changes, DMMs unique benefits vis-a-vis the Closing Auction process would be significantly altered, obviating the need for Prohibited Transactions. Specifically:
DMMs would still have the obligation to select a Closing Auction Price that satisfies all better-priced orders on the Side of the Imbalance and supply liquidity as needed to facilitate a fair and orderly Closing Auction Process. However, as proposed, the DMM would now be systematically restricted as to the price range at which the Closing Auction Price could be determined and therefore DMMs would be subject to a further limitation on how they may select the Closing Auction Price. Accordingly, the Exchange believes this proposed change would maintain obligations on DMMs with respect to the Closing Auction while decreasing the tools available to meet those obligations.
DMMs would no longer have discretion after the end of Core Trading Hours to enter or cancel DMM Interest.
Instead, as proposed, after the end of Core Trading Hours, DMMs would be able to enter only DMM Auction Liquidity and could enter such interest only at pre-determined price ranges and only if such interest would offset Unpaired Quantity at those predetermined price ranges. Accordingly, such interest would be systematically restricted by side, price, and quantity.
This change ensures that DMM Auction Liquidity could be used only to dampen significant price movements at the close. The Exchange believes this proposed change significantly decreases unique benefits to the DMMs because they would still be required to supply liquidity as needed to support a fair and orderly Closing Auction, but would have limited tools to enter any such interest after the end of Core Trading Hours.
The Exchange proposes to make the Closing D Order available to DMMs in part to offset this reduction of unique benefits with respect to entering or cancelling DMM Interest after the end of Core Trading Hours. However, unlike how DMMs currently may enter and cancel DMM Interest, DMMs would not receive any unique treatment with
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