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Federal Register / Vol. 86, No. 181 / Wednesday, September 22, 2021 / Notices
7.35Ba2, 7.31c2C, and 7.35a9
regarding how DMMs would participate in the Closing Auction would remove impediments to and perfect the mechanism of a free and open market and a national market system because the proposed changes would promote transparency and determinism regarding the Closing Auction process by eliminating DMMs ability to cancel interest after the end of Core Trading Hours and limiting their ability to enter interest after the end of Core Trading Hours. As a result of the proposed changes, DMMs would no longer have discretion after the end of Core Trading Hours to enter or cancel DMM Interest, which could potentially impact the Closing Auction Price. Instead, as proposed, DMMs would be able to meet their obligation under Rule 104a3 to supply liquidity as needed by either entering Closing D Orders before the end of Core Trading Hours or entering DMM Auction Liquidity after the end of Core Trading Hours, but only to offset Unpaired Quantity at the Closing Auction Price which must be within a predetermined range, as described above. Accordingly, with these proposed changes, a DMM could enter DMM Auction Liquidity after the end of Core Trading Hours only to close a security at a price that is at or closer to the Imbalance Reference Price than the published Continuous Book Clearing Price.
The Exchange believes that making Closing D Orders available to DMMs would remove impediments to and perfect the mechanism of a free and open market and a national market system because they would provide DMMs with a replacement mechanism both to meet their ongoing Rule 104a3 obligations with respect to the Closing Auction to contribute their own capital to supply liquidity as needed to assist in the maintenance of a fair and orderly market and to manage the risk of the DMM. The Exchange further believes that it would promote transparency and determinism to the Closing Auction process for DMMs to enter their interest before the end of Core Trading Hours. Specifically, the Exchange proposes that Closing D
Orders entered by a DMM would be included in the Closing Auction Imbalance Information at their undisplayed discretionary price beginning five minutes before the end of Core Trading Hours, which is when Closing D Orders entered by Floor brokers are included in the Closing Auction Imbalance Information. With this change, Closing D Orders entered by DMMs would be reflected in the
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Closing Auction Imbalance Information, which is not the case for DMM Interest currently entered or cancelled after the end of Core Trading Hours. Market participants would be able to respond to any changes in the Closing Auction Imbalance Information that may result from Closing D Orders entered by DMMs by entering interest into the continuous order book or retaining the services of a Floor broker to enter Closing D Orders on their behalf.
In addition, Closing D Orders are not novel and the Exchange proposes that they would function for DMMs in a similar manner as they currently function for Floor brokers, with only two substantive differences. First, DMMs could not combine a Yielding Modifier with a Closing D Order. The Yielding Modifier is not necessary for DMMs because their transactions on the Exchange are as a dealer acting in the capacity as a market maker, and therefore they are not subject to the trading prohibitions specified in Section 11a of the Act.50 Second, Closing D
Orders entered by a DMM in NYSElisted securities would not be able to participate in a Core Open Auction or Trading Halt Auction. Because the purpose of providing Closing D Orders to DMMs is to provide them with a tool to participate in Closing Auctions, the Exchange does not believe that Closing D Orders entered by DMMs in NYSElisted securities would need to participate in a Core Open Auction or Trading Halt Auction on the Exchange.
The Exchange further believes that providing DMMs with the ability to enter Closing D Orders in securities that trade on the Exchange, including UTP
Securities, that are not assigned to them as a DMM, would remove impediments to and perfect the mechanism of a free and open market and a national market system and support the maintenance of a fair and orderly market because it would provide a mechanism for DMMs to enter such orders directly. Currently, a DMM may choose to use a Floor broker to enter Closing D Orders in securities that have not been assigned to that DMM. The Exchange believes that allowing DMMs to enter Closing D
Orders directly would reduce operational complexity and cost for DMMs, thereby creating an incentive for additional firms to register as a DMM.
This proposed change would also make it easier for regulatory staff to monitor DMM trading activity on the Exchange.
In addition, the Exchange believes that making this order type available to DMMs for all securities that trade on the Exchange would provide an incentive 50 See
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for additional broker-dealers to register as a DMM on the Exchange.
Specifically, the Exchange believes that providing potential new DMM entrants with additional opportunities to provide liquidity across all securities that trade on the Exchange may serve as an incentive for new entrants to undertake the costs to register as a DMM unit without a significant roster of allocated securities. The Exchange further believes that promoting diversity of DMMs would remove impediments to and perfect the mechanism of a free and open market and a national market system by providing issuers with additional choice in their DMM
assignments.
The Exchange believes that the proposed amendments to Rule 7.35a9B and C would remove impediments to and perfect the mechanism of a free and open market and a national market system because they would promote clarity and transparency regarding the terms DMM
Order and DMM Auction Liquidity in a manner designed to conform to the substantive changes to how DMMs would participate in the Closing Auction. The Exchange further believes that the proposed amendment to Rule 7.35Bj2Aiii would similarly remove impediments to and perfect the mechanism of a free and open market and a national market system because the proposed amendment is consistent with the proposal that DMM Orders would not be eligible to participate in a Closing Auction; if a DMM were permitted to enter DMM Orders during a Solicitation Period under that Rule, such orders would need to be cancelled before the Closing Auction, per proposed changes to Rule 7.35Ba2.
DMM Interest Allocation in the Closing Auction. The Exchange believes that the proposed amendments to Rule 7.35Bh to change how DMM Interest, including Closing D Orders entered by a DMM, would be allocated in a Closing Auction, would remove impediments to and perfect the mechanism of a free and open market and a national market system because the proposed changes are designed to process DMM Interest consistent with the role of the DMM in a particular Closing Auction:
The Exchange believes that amending Rule 7.35Bh1 to provide that better-priced Closing D Orders entered by a DMM would be guaranteed to participate in the Closing Auction subject to DMM-specific self-trade prevention would promote a fair and orderly Closing Auction process because better-priced DMM Closing D Orders would not receive a different allocation opportunity from other Participants that
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