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Federal Register / Vol. 86, No. 104 / Wednesday, June 2, 2021 / Notices
impact the ability of Securities to trade on other exchanges or OTC.
Qualifying Thinly Traded Securities Trading Only on BSTX

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The Exchange proposes to suspend UTP in Securities that meet the proposed definition of a Thinly Traded Security in order to concentrate displayed liquidity for such Securities, make market making in such securities more attractive, and thereby improve the market quality for such Securities.
As proposed, Thinly Traded Securities would still be able to trade OTC, but would not be eligible for trading on another national securities exchange for as long as the Security meets the definition of a Thinly Traded Security, described below.
The Commission, Commission staff, the U.S. Department of Treasury,42
academics, and a broad spectrum of market participants have recognized that the current one-size-fits-all equity market structure, as largely governed under Regulation NMS, may not be optimal for thinly traded securities 43 and that more needs to be done to promote liquidity and to improve the listing and trading environment for thinly traded stocks. 44 The Commission noted that the secondary market for thinly traded securities faces liquidity challenges that can have a negative effect on both investors and issuers traded securities faces liquidity challenges that can have a negative effect on both investors and issuer including wider spreads and less displayed size relative to securities that trade in greater volume, often resulting in higher transaction costs for investors. 45 These concerns have been echoed in statements by former Commission Chairman Jay Clayton,46
42 See U.S. Department of the Treasury, A
Financial System That Creates Economic Opportunities: Capital Markets October 2017, https www.treasury.gov/press-center/pressreleases/Documents/A-Financial-System-CapitalMarketsFINAL-FINAL.pdf Treasury Report.
43 Commission Statement on Market Structure Innovation for Thinly Traded Securities Oct. 17, 2019, 84 FR 56956 Oct. 24, 2019 Commission Statement on Thinly Traded Securities.
44 See Division of Trading and Markets, Commission, Background Paper on the Market Structure for Thinly Traded Securities, at 9 Oct.
17, 2019, https www.sec.gov/rules/policy/2019/
thinly-traded-securities-tm-background-paper.pdf TM Background Paper summarizing the views of certain participants in the Commission staffs Roundtable on the Market Structure for Thinly Traded Securities in April 2018.
45 Commission Statement on Thinly Traded Securities at 56956.
46 Illiquidity hampers thinly-traded issuers in many areas, including in their ability to raise additional capital, obtain research coverage, engage in mergers and acquisitions, and hire and retain personnel. Chairman Jay Clayton, Commission,
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former Director of the Division of Trading and Market Brett Redfearn,47
the Commissions Small Business Advisory Committee 48 and demonstrated through empirical analyses by the Division of Trading and Markets Office of Analytics and Research OAR 49 and academics.50
A frequently discussed potential solution to these liquidity and poor market quality issues facing thinly traded securities has been the suspension of UTP for such securities, allowing for displayed liquidity to be concentrated on a single exchange.51
Equity Market Structure 2019: Looking Back &
Moving Forward, Remarks at Gabelli School of Business, Fordham University, New York, New York March 8, 2019 2019 Market Structure Remarks, https www.sec.gov/news/speech/
clayton-redfearn-equity-market-structure-2019.
47 I believe there are serious questions, however, about whether the current market structure that works relatively well for very active stocks is optimal for thinly traded securities. Brett Redfearn, Director of the Division of Trading and Markets, Commission, Modernizing U.S. Equity Market Structure June 22, 2020 2020 Market Structure Remarks, https www.sec.gov/news/
speech/clayton-redfearn-modernizing-us-equitymarket-structure-2020-06-22.
48 Advisory Committee on Small and Emerging Companies, Commission, Recommendation Regarding Separate U.S. Equity Market for Securities of Small and Emerging Companies February 1, 2013 generally finding that the U.S.
equity markets frequently fail to offer a satisfactory trading venue for small and emerging companies, which i has discouraged initial public offerings of the securities of such companies, ii undermines entrepreneurship, and iii weakens the broader U.S. economy, https www.sec.gov/info/smallbus/
acsec/acsecrecommendation-032113-emerg-coltr.pdf.
49 Division of Trading and Markets, Commission, Empirical Analysis of Liquidity Demographics and Market Quality, April 10, 2018 OAR Report, https www.sec.gov/files/thinly_traded_eqs_data_
summary.pdf finding, among other things, that thinly traded securities i had, on average, fewer exchanges quoting at the national best bid or national best offer than more actively traded securities; ii had quoted depths at the inside i.e., the volume of shares available at the highest bid and lowest offer were smaller and quoted spreads i.e., the difference between bid and offer prices and relative quoted spreads were greater for these thinly traded securities relative to more actively traded securities; and iii likely 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. See also TM Background Paper at 23
summarizing the findings from the OAR Report.
50 See e.g., TM Background Paper at 67 noting that the economic literature in this area of liquidity and trading volume has consistently documented that stocks with lower trading volume tend to have higher transaction costs and numerous studies have found evidence linking lower liquidity to lower stock prices, which suggests that diminished liquidity may also impact stock prices. These analyses show that investors must be paid a premium in order to hold less liquid stocks. Consequently, thinly traded securities may have lower stock prices due to diminished liquidity. internal citations omitted.
51 See e.g., Treasury Report at 60 Treasury recommends that issuers of less-liquid stocks, in
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Indeed, as former Chairman Jay Clayton noted, the Commissions Statement on Market Structure Innovation for Thinly Traded Securities specifically invites market participants to submit innovative proposals designed to improve the secondary market for thinly traded securities, including, in connection with such proposals, requests to suspend or terminate unlisted trading privileges, known as UTP. 52 In response to the Commissions call and to improve the market quality for thinly traded securities, the Exchange proposes a suspension of UTP for qualifying Thinly Traded Securities, as detailed further below.
Thinly Traded Securities Defined The Exchange proposes in Rule 25150a to define Thinly Traded Securities as a Security 53 of an operating company that meets certain market capitalization and average daily volume of trading ADV
requirements. The Exchange proposes two separate, but similar, types of eligibility criteria depending on if a Security has been publicly traded for at least six months or if the Security is just beginning to trade publicly i.e., publicly traded for less than six months. Specifically, the Exchange proposes that a Security that has been publicly traded for at least six months shall be considered a Thinly Traded Security if the Security has i market capitalization of less than $1 billion, and ii an average daily volume of trading of 100,000 shares or less during at least four 4 of the preceding six 6
calendar months Ongoing Eligibility Criteria. For a Security that has not been publicly traded for at least six months, the Exchange proposes that a Security shall be considered a Thinly Traded Security if during the first three consultation with their underwriter and listing exchange, be permitted to partially or fully suspend UTP for their securities and select the exchanges and venues upon which their securities will trade.; 2019 Market Structure Remarks, at n.13
noting that several panelists on the Roundtable on Market Structure for Thinly-Traded Securities, supported the approach of limiting unlisted trading privileges, with some suggesting going even farther and considering whether Regulation NMS rules should be eliminated in this segment of the market.
52 2020 Market Structure Remarks. See also Commission Statement on Thinly Traded Securities at 56957 therefore, for thinly traded securities, the Commission is interested in considering proposals for market structure innovations in conjunction with the potential suspension or termination of UTP and/or the possibility of exemptive relief from Regulation NMS and other rules under the Exchange Act..
53 The Exchange proposes to define a Security to mean a NMS stock, as defined in Rule 600b47
of the Exchange Act, trading on the BSTX System.
See proposed Rule 17000a31.

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