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Federal Register / Vol. 86, No. 38 / Monday, March 1, 2021 / Notices
Session beginning at 7:00 a.m. ET when the Exchange extends its Early Trading Session hours. As described above, certain market participants, such as retail investors and liquidity providers, may be limited in their ability to source liquidity that is available in the Exchanges Early Trading Session or choose not to participate in the Early Trading Session without the availability of a 7:00 a.m. Start designation, thereby reducing liquidity available to other market participants and investors. Thus, the proposed rule change will alleviate potential difficulties for Users that generally begin participating in in the markets at 7:00 a.m. ET as these Users would not have to time the entry of their orders to occur as close to 7:00 a.m. ET
as possible, and will facilitate a fair and orderly market on the Exchange by allowing retail investors and other market participants to benefit from trading opportunities present at this specific time during the Exchanges Early Trading Session. Overall, the proposed rule change will serve to protect investors and the public interest by providing Users with greater control over their orders and more flexibility to carry out their investment strategies and manage their needs based on market conditions, thereby allowing them to continue to provide meaningful liquidity and benefit from trading opportunities present on the Exchange throughout the duration of the Early Trading Session.
The proposed rule change will not affect the protection of investors as it would simply provide Users with the opportunity to choose whether orders entered for potential execution in the Early Trading Session will become active at the new 4:00 a.m. ET
commencement of that trading session, or will instead continue to become active at 7:00 a.m. ET, as they do today.
The System will continue to accept all orders eligible for execution during the Early Trading Session beginning at the early acceptance time, will continue to reject the same list of order types prior to the time an order is eligible to start trading in the Early Trading Session, and will continue to process all orders that are queued for participation in the Early Trading Session in time priority pursuant to Rule 11.1.23 That is, orders with a 7:00 a.m. Start designation will be handled as any incoming order is handled during the Early Trading Session, and merge, in time sequence, onto the already active EDGX Order Book for the Early Trading Session. As described above, a User must continue to select the appropriate TIF to allow 23 See
also supra note 15.

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the order to execute in the Early Trading Session and a port setting step will just permit an order already marked for execution in the Early Trading Session to become active later in the Early Trading Session. The proposed rule change does not extend or otherwise modify any trading hours during which trading is currently permissible on the Exchange but simply permits Users to choose to activate their orders at a specific time during an ongoing trading session.
The Exchange also notes that, as with any order eligible for trading in the Early Trading Session, market participants must monitor market conditions to ensure compliance with best execution obligations 24 for their orders with a 7:00 a.m. Start designation and will be able to cancel or modify their orders with a 7:00 a.m. Start time designation at any time prior to their activation, thus allowing them to react to market conditions that may cause them to violate their best execution obligations. FINRA Rule 5310a1
provides that a member must use reasonable diligence to ascertain the best market for a security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. FINRA Rule 5310a1A
states that one of the factors that will be considered in determining whether a member has used reasonable diligence is the character of the market for the security e.g., price, volatility, relative liquidity, and pressure on available communication. 25 The Exchange believes that Users are accustomed to this additional analysis and will continue to apply such in determining whether to designate an activation at 7:00 a.m. ET. The regulatory guidance with respect to best execution anticipates the continued evolution of execution venues:
Best execution is a facts and circumstances determination. A brokerdealer must consider several factors affecting the quality of execution, including, for example, the opportunity for price 24 A members best execution obligation may also include cancelling an order when market conditions deteriorate and could result in an inferior execution or informing customers where the execution of their order may be delayed intentionally as the member utilizes reasonable diligence to ascertain the best market for the security. See FINRA Rule 5130. See also FINRA
Regulatory Notice 1546, Best Execution. Guidance on Best Execution Obligations in Equity, Options, and Fixed Income Markets, November 2015.
25 These characteristics are reflected in the disclosure requirements mandated by Exchange Rule 3.21 before a Member may accept an order from a customer for execution in the Pre-Opening, Post-Closing, and proposed Early Trading Sessions.

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improvement, the likelihood of execution . . ., the speed of execution and the trading characteristics of the security, together with other non-price factors such as reliability and service.26

To the extent there may be best execution obligations at issue, they are no different than the best execution obligations faced by brokers in the current market structure, including the current use of orders that become eligible for execution at the start of the Early Trading Session, Pre-Opening Session or Regular Trading Hours, depending on the TIF selected by the User. A User may use continue to use TIF instructions to forgo a possible execution at the start of one trading session, or at a 7 a.m. Start time, as proposed, if they believe doing so is consistent with their best execution obligations as they anticipate that the market for the security may improve upon the start of another trading session, or at 7:00 a.m. ET, as proposed.
Applicable best execution guidance contains no formulaic mandate as to whether or how brokers should direct orders. The optionality created by the proposed rule change simply represents one tool available to User to meet their best execution obligations.
The Exchange also notes that Users are required to implement regulatory risk management controls and procedures that are reasonably designed to prevent the entry of orders that fail to comply with regulatory requirements that apply on a pre-order entry basis pursuant to the Market Access Rule under 15c35of the Act.27 These pretrade controls must, for example, be reasonably designed to assure compliance with Exchange trading rules and Commission rules under Regulation SHO 28 and Regulation NMS.29 In accordance with the Market Access Rule, a Users procedures must be reasonably designed to ensure compliance with their applicable regulatory requirements, not just at the time the order is routed to the Exchange, but also at the time the order becomes eligible for execution.
In addition to this, the proposed rule change will not affect the protection of investors as it is generally consistent 26 See Securities Exchange Act Release No. 43950
November 17, 2000, 65 FR 75414 December 1, 2000 Disclosure of Order Execution and Routing Practices release.
27 See Securities Exchange Act Release No. 63241
November 3, 2010, 75 FR 69792 November 15, 2010 File no. S70310.
28 See e.g., Question 2.6 of the Division of Trading and Markets: Response to Frequently Asked Questions Concerning Regulations SHO, available at https www.sec.gov/divisions/marketreg/
mrfaqregsho1204.htm.
29 17 CFR 240.610611.

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