FR 2021-03545

The document under review is a notice from the Securities and Exchange Commission regarding a proposed rule change filed by the New York Stock Exchange (NYSE). This change seeks to update NYSE Rule 7.35C, which concerns how the Auction Reference Price is set for Core Open Auctions, an essential part of how stocks begin trading each day. The proposed change intends to align NYSE practices with those of its affiliates, NYSE Arca and NYSE American, to refine how auctions are conducted, especially during periods of significant market volatility.

Summary

The NYSE aims to adjust the method for determining the Auction Reference Price to minimize cases where auctions are restricted by price collars. Price collars serve as a safety mechanism in trading, preventing transactions from occurring too far outside of recently established prices. The plan is to adopt the same methodology that NYSE’s affiliates use, which considers the midpoint of the National Best Bid and Offer (NBBO) as a reference, barring the occurrence of locked markets or absence of a recent closing price. This is designed to create more efficient and accurate market openings by reducing the percentage of auctions subject to such collars.

Significant Issues and Concerns

One of the primary issues with the document is that it is filled with technical jargon and regulatory references, which can be challenging for individuals who are not familiar with stock exchange operations to fully grasp. The document lacks a straightforward explanation of concepts like the National Best Bid and Offer (NBBO) and how it impacts auction pricing, which might lead to confusion among lay readers. Furthermore, the document frequently cites previous legal and regulatory actions, assuming a level of familiarity with these precedents that may not exist among the general public.

Impact on the Public

For the general investing public, these changes are likely to be positive. By refining the auction process, the rule change aims to ensure that more securities can open at prices that reflect the true market conditions, reducing the likelihood of being bound by restrictive collars. This can enhance market efficiency and stability, important factors for everyday investors relying on fair market conditions for their trades.

Impact on Specific Stakeholders

For market participants such as brokerage firms and institutional investors, the proposed changes could mean smoother opening transitions, with reduced aberrations caused by sudden volatility. This can promote increased confidence in the opening prices and, by extension, in market operations more generally. Additionally, aligning practices across different exchanges under the NYSE umbrella can lead to more uniform operations, which can be beneficial for firms operating across these entities.

On the flip side, technical changes required by this proposal may demand resources for implementation, which can be burdensome, especially for smaller firms that may not have the same scale of technology operations as larger entities. Moreover, stakeholders who may have grown accustomed to the existing system could face a learning curve adjusting to the new reference price methodology.

In conclusion, while the document’s complex language can be challenging, the underlying changes proposed by the NYSE aim to facilitate a more adaptive and fair market trading environment, particularly during volatile periods. However, it will be crucial to ensure that stakeholders are well-informed and prepared for these adjustments to maximize the benefits of these proposed changes.

In reviewing the document, there are several references to financial values and pricing mechanisms that may be challenging for those unfamiliar with stock exchange operations. The document covers a proposed rule change by the New York Stock Exchange regarding how certain prices are set during stock auctions, which is crucial for understanding how stocks open for trading each day.

Auction Collars and Reference Prices

The document discusses the concept of Auction Collars, which are limits set on how much the opening price of a stock can deviate from a reference price. Specifically, it mentions that currently, these collars are set at the greater of $0.15 or 10% away from the Auction Reference Price. For clarity, this means if the Auction Reference Price of a stock is set at $10.00, the stock can open at a price ranging from $9.00 to $11.00, or it can deviate by at least $0.15, if that is greater.

In an effort to stabilize trading and reduce the likelihood of stocks opening with these collars, the Exchange initially increased these limits to the greater of $1.00 or 10% away from the Auction Reference Price during a period of high market volatility. This adjustment was made to manage price fluctuations and help ensure stable market openings amid unexpected market conditions.

Market Volatility and Pricing Impact

From June 4 to June 17, 2020, despite widened collars, market-wide volatility meant that a good number of stocks could still hit these price caps. The effect of these collars was particularly evident when a stock like the SPDR S&P 500 ETF Trust (SPY) saw a price movement of more than 1% overnight. During this period, 1.4% of the auctions were subject to these collars, compared to only 0.5% during less volatile overnight periods.

Impact on Securities Under $10.00

The document indicates that 30% of auctions during a phase when trading floors were closed had prices subject to these collars. Of these, 50% were securities priced under $10.00. Without the collars, these stocks might have opened at prices between $0.15 and $1.00 away from the reference price — a potentially significant variation in percentage terms for lower-priced stocks.

Conclusion

These financial references indicate an intricate balance the Exchange must maintain between stability and flexibility in security pricing. The complexity of using financial terms like "Auction Collars" and specific numerical thresholds highlights the need for these controls to protect investors and maintain orderly market operations. The proposal seeks to refine these mechanisms consistent with methods implemented by other exchanges, helping to manage financial risks involved in stock auctions while accommodating market conditions and ensuring fair participation across different trading platforms. This focus on precise monetary terms aims to maintain market integrity and smooth operation on volatile trading days.