# In the Matter of the Application of 24X National Exchange LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-28551 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** December 6, 2024 - **Citation:** 89 FR 97092 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-101777; File No. 10-242] In the Matter of the Application of 24X National Exchange LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission November 27, 2024. I. Introduction and Procedural History On February 6, 2024, 24X National Exchange LLC (“24X” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) a Form 1 application under the Securities Exchange Act of 1934 (“Exchange Act”) seeking registration as a national securities exchange under section 6 of the Exchange Act. 1 Notice of the application was published for comment in the Federal Register on March 4, 2024. 2 The Commission received five comments on the Notice 3 and a letter responding to the comments from 24X. 4 On May 31, 2024, the Commission instituted proceedings pursuant to section 19(a)(1)(B) of the Exchange Act 5 to determine whether to grant or deny 24X's application for registration as a national securities exchange under section 6 of the Exchange Act (the “OIP”). 6 After issuance of the OIP, the Commission received six comment letters 7 and a letter responding to the comments from 24X. 8 On August 21, 2024, 24X filed an amendment to its Form 1 application (“Amendment No. 1”), 9 which was published for comment in the Federal Register on September 3, 2024. 10 On August 30, 2024, the Commission extended, pursuant to section 19(a)(1)(B) of the Exchange Act, 11 the time period for granting or denying 24X's Form 1 application for an additional 90 days, until November 29, 2024. 12 After issuance of Amendment No. 1, the Commission received three comment letters 13 and a letter responding to the comments from 24X. 14 On October 23, 2024, 24X filed a second amendment to its Form 1 application (“Amendment No. 2”), 15 which was published for comment in the Federal Register on October 30, 2024. 16 After issuance of Amendment No. 2, the Commission received two comment letters 17 and a letter responding to the comments from 24X. 18 1 15 U.S.C. 78f. The Form 1 is available on the Commission's website at: https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/24x-form-1. 2 See Securities Exchange Act Release No. 99614 (Feb. 27, 2024), 89 FR 15621 (Mar. 4, 2024) (“Notice”). 3 See letters from James J. Angel, Ph.D., CFP, CFA, Associate Professor of Finance, Georgetown University, McDonough School of Business, dated Apr. 5, 2024 (“Angel Letter I”) and dated May 13, 2024 (“Angel Letter II”); Stan Sater, Senior Legal Counsel, Polygon.io, Inc., dated Apr. 25, 2024 (“Polygon Letter”); Andrew Glover, University of Washington and Ed deHaan, Professor of Accounting, Stanford University, dated Apr. 22, 2024 (“Glover and deHaan Letter”); Eun Ah Choi, Senior Vice President, Nasdaq, Inc., dated Apr. 25, 2024 (“Nasdaq Letter”). The public comment file for 24X's Form 1 (File No. 10-242) is available on the Commission's website at: https://www.sec.gov/comments/10-242/10-242.htm. 4 See letter from David Sassoon, General Counsel, 24X, dated May 30, 2024 (“24X Letter”). 5 15 U.S.C. 78s(a)(1)(B). 6 See Securities Exchange Act Release No. 100254 (May 31, 2024), 89 FR 48466 (June 6, 2024). 7 See letters from Richard Montone, JD/MBA student, Hofstra University, dated June 26, 2024 (“Montone Letter”); Ellen Greene, Managing Director, Equity and Options Market Structure, Securities Industry and Financial Markets Association (“SIFMA”), dated June 27, 2024 (“SIFMA Letter”); Benjamin L. Schiffrin, Director of Securities Policy, Better Markets, Inc., dated June 27, 2024 (“Better Markets Letter”); Chris Nagy, Research Director, and Tyler Gellasch, President and Chief Executive Officer, Healthy Markets Association, dated June 28, 2024 (“Healthy Markets Letter”); Jeffrey M. Pasquerella, Chief Legal Officer, DriveWealth, LLC., dated June 28, 2024 (“DriveWealth Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group, dated July 26, 2024 (“FIA PTG Letter”). 8 See letter from David Sassoon, General Counsel, 24X, dated Aug. 21, 2024 (“24X Letter II”). 9 Amendment No. 1 is available on the Commission's website at: https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/24x-form-1. In Amendment No. 1, 24X amended Exhibits B, B-1, C, C-2, D, D-1, D-2, D-3, D-4, E, E-1 and N. For purposes of this Order, references to Exhibits C, C-2, D, D-1, D-3, and N will be to the amended Exhibits filed with Amendment No. 1. See infra note 15 (describing references to Exhibits B, B-1, E and E-1 for purposes of this Order). 10 See Securities Exchange Act Release No. 100839 (Aug. 27, 2024), 89 FR 71471 (Sept. 3, 2024). 11 15 U.S.C. 78s(a)(1)(B). 12 See Securities Exchange Act Release No. 100884 (Aug. 30, 2024), 89 FR 72917 (Sept. 6, 2024). 13 See letters from Patrick Blonien, Instructor of Finance, Carnegie Mellon University, and Alexander Ober, Ph.D. Candidate in Finance, Rice University, undated (“Blonien and Ober Letter”); John Ramsay, Chief Market Policy Officer, Investors' Exchange LLC (`IEX”), dated Oct. 9, 2024 (“IEX Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group, dated Oct. 11, 2024 (“FIA PTG Letter II”). 14 See letter from David Sassoon, General Counsel, 24X, dated Nov. 1, 2024 (“24X Letter III”). 15 Amendment No. 2 is available on the Commission's website at: https://www.sec.gov/rules-regulations/other-commission-orders-notices-information/24x-form-1. In Amendment No. 2, 24X amended Exhibits B, B-1, E, and E-1. For purposes of this Order, references to these listed Exhibits will be to the amended Exhibits filed with Amendment No. 2. 16 See Securities Exchange Act Release No. 101431 (Oct. 24, 2024), 89 FR 86400 (Oct. 30, 2024). 17 See letters from Ellen Green, Managing Director, Equities and Options Market Structure, SIFMA, dated Oct. 29, 2024 (“SIFMA Letter II”); Adrian Griffiths, Head of Market Structure, MEMX LLC (“MEMX Letter”), dated Oct. 29, 2024. 18 See letter from David Sassoon, General Counsel, 24X, dated Nov. 18, 2024 (“24X Letter IV”). The Commission has reviewed 24X's Form 1 application, as amended, together with the comment letters received, in order to make a determination whether to grant such registration. For the reasons set forth below and based on the representations set forth in 24X's Form 1 application, as amended, this order grants 24X's Form 1 application, as amended, for registration as a national securities exchange. II. Statutory Standards Pursuant to sections 6(b) and 19(a) of the Exchange Act, 19 the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Exchange Act and can comply, and can enforce compliance by its members and persons associated with its members, with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the exchange. 20 19 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively. 20 15 U.S.C. 78f(b)(1). As discussed in greater detail below, the Commission finds that 24X's application, as amended, for registration as a national securities exchange meets the requirements of the Exchange Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of 24X are consistent with section 6 of the Exchange Act in that, among other things, they are designed to: (1) assure fair representation of the exchange's members in the selection of its directors and administration of its affairs and provide that, among other things, one or more directors shall be representative of investors and not be associated with the exchange, or with a broker or dealer; 21 (2) prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system; 22 (3) not permit unfair discrimination between customers, issuers, or dealers; 23 and (4) protect investors and the public interest. 24 The Commission also finds that the proposed rules of 24X are consistent with section 11A of the Exchange Act. 25 Finally, the Commission finds that 24X's proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. 26 21 See U.S.C. 78f(b)(3). 22 See U.S.C. 78f(b)(5). 23 See id. 24 See id. 25 See 15 U.S.C. 78k-1. 26 See 15 U.S.C. 78f(b)(8). III. Discussion A. Ownership and Governance of 24X 24X is a Delaware limited liability company, 27 which is wholly-owned by its sole member, 24X US Holdings LLC (“24X US”), which also is a Delaware limited liability company. 28 24X US, in turn, is wholly-owned by 24X Bermuda Holdings LLC (“24X Bermuda”), which is a limited liability company formed under the laws of Bermuda. 29 24X US will be managed by, and all decisions regarding 24X US will be made by, 24X Bermuda. 30 Generally, the members of 24X Bermuda include holders of “Preferred Units,” 31 “Common Units” 32 and “Non-Voting Units.” 33 Common Units and Preferred Units except Series Seed-2 Units have general voting power, and are defined as “Voting Units.” 34 Each Voting Unit has one vote. 35 27 See Certificate of Formation of 24X National Exchange LLC. 28 See Certificate of Formation of 24X US Holdings LLC. 29 See Certificate of Formation of 24X Bermuda Holdings LLC. 30 See Second Amended and Restated Limited Liability Company Agreement of 24X US Holdings LLC (“24X US LLC Agreement”), Section VI(a). 31 “Preferred Units” means “Series A Units and the Series Seed Units.” See Third Amended and Restated Limited Liability Company Agreement of 24X Bermuda LLC (“24X Bermuda LLC Agreement”), Article 1, 1.45. See also id. at Article 1, 1.55 and 1.60 defining Series A Units and Series Seed Units. 32 “Common Units” means “[u]nits of common membership interests of the Company, or any other ownership interests of the Company into which such units are reclassified, reconstituted or exchanged.” See id. at Article 1, 1.16. 33 “Non-Voting Units” means “units of non-voting membership interests of the Company, or any other ownership interests of the Company into which such units are reclassified, reconstituted or exchanged.” See id. at Article 1, 1.38. A description of the members of 24X Bermuda and their respective ownership levels is set forth in Exhibit K. See also infra section III.B.1. 34 See 24X Bermuda LLC Agreement, Article 1, 1.75. See also id. at Article 1, Section 1.64 defining Series Seed-2 Units. 35 See 24X Bermuda LLC Agreement, Article 1, 1.75. 1. 24X Board of Directors 24X proposed that its business and affairs as a national securities exchange will be managed by a Board 36 comprised of a minimum of seven Directors 37 (“24X Board”). 38 The 24X Board will consist of: 36 See Amended and Restated Limited Liability Company Agreement of 24X National Exchange LLC (“24X LLC Agreement”), Article I, (d). 37 See id., at Article I, (l). 38 See id., at Article VI, Section 6.1(b). (A) one Director who is the Chief Executive Officer of the Exchange and who shall be deemed to be an Industry Director; 39 39 See id., at Article VI, Section 6.1(c)(i)(A). See also id. at Article I, (w). (B) Non-Industry Directors, 40 including at least one (1) Independent Director, 41 the number of which shall equal or exceed the sum of the number of Industry Directors and Member Representative Directors; 42 40 See id., at Article VI, Section 6.1(c)(i)(B)(1). See also id. at Article I, (ee). 41 See id., at Article I, (v). 42 See id., at Article VI, Section 6.1(c)(i)(B)(1). See also id. at Article I, (bb). (C) Member Representative Directors, the number of which must be at least twenty percent of the 24X Board; 43 and 43 See id., at Article VI, Section 6.1(c)(1)(B)(2). If twenty percent of the Directors then serving on the 24X Board is not a whole number, such minimum number of Member Representative Directors shall be rounded up to the next whole number. Id. (D) at least one of the Non-Industry Directors shall be representative of issuers and investors and not associated with an Exchange Member, a broker, or a dealer. 44 44 See id., at Article VI, Section 6.1(c)(1)(B)(3). The first annual meeting of 24X will be held within 90 days after the Commission grants 24X's exchange registration. 45 45 See 24X LLC Agreement, Article III, Section 3.4(a). In addition, 24X US will appoint the initial Nominating Committee and Member Nominating Committee, consistent with each committee's compositional requirements, to nominate candidates for election to the 24X Board. 46 The Nominating Committee and Member Nominating Committee, after completion of their respective duties for nominating directors for election to the 24X Board for that year, will recommend candidates to serve on the succeeding year's Nominating Committee or Member Nominating Committee, as applicable. 47 Exchange Members 48 will have rights to nominate and elect additional candidates for the Member Nominating Committee pursuant to a petition process. 49 46 See 24X LLC Agreement, Article VI, Section 6.2(g)(ii). 47 Id. 48 “Exchange Member” means “any registered broker or dealer that has been admitted to membership in the national securities exchange operated by the Company. An Exchange Member is not a member of the Company by reason of being an Exchange Member. An Exchange Member will have the status of a `member' of the Exchange as that term is defined in Section 3(a)(3) of the Exchange Act.” See 24X LLC Agreement, Article I, (o). 49 See 24X LLC Agreement, Article VI, Section 6.1(d)(iii). The Nominating Committee will nominate candidates for election to the 24X Board. 50 For the Member Representative Director positions, the Member Nominating Committee, composed solely of Member Representative Committee or Panel Members, 51 shall consult with the Nominating Committee and the Chairman of the 24X Board and solicit comments from Exchange Members for the purpose of approving and submitting names of candidates for election to the position of Member Representative Director. 52 If no candidates are nominated pursuant to a petition process, then the initial nominees approved and submitted by the Member Nominating Committee will be nominated as Member Representative Directors by the Nominating Committee. 53 If a petition process produces additional candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Member Nominating Committee, will be presented to Exchange Members for election to determine the final designees for any open Member Representative Director positions. 54 In the event of a contested election, the candidates who receive the most votes will be selected as the Member Representative Director designees by the Member Nominating Committee. 55 50 See 24X LLC Agreement, Article VI, Section 6.1(d)(i). 51 “Member Representative Committee or Panel Members” means a member of any Committee or hearing panel who is an officer, director, employee or agent of an Exchange Member that does not own, directly or indirectly, any Units. See 24X LLC Agreement, Article I (aa). 52 See 24X LLC Agreement, Article VI, Section 6.1(d)(ii). 53 See 24X LLC Agreement, Article VI, Section 6.1(d)(v). 54 Id. 55 See 24X LLC Agreement, Article VI, Section 6.1(d)(vi). The 24X governance provisions are consistent with the Exchange Act. In particular, the requirement that the number of Member Representative Directors must be at least 20% of the 24X Board and the means by which they will be chosen by Exchange Members provides for the fair representation of members in the selection of directors and the administration of 24X and therefore are consistent with section 6(b)(3) of the Exchange Act. 56 This requirement helps to ensure that members of an exchange have a voice in an exchange's self-regulatory program, and that an exchange is administered in a way that is equitable to all those who trade on its market or through its facilities. 57 56 15 U.S.C. 78f(b)(3). 57 See, e.g., Securities Exchange Act Release Nos. 100539 (July 15, 2024), 89 FR 58848 (July 19, 2024) (File No. 10-240) (order granting registration of MIAX Sapphire, LLC) (“Sapphire Order”); 88806 (May 4, 2020), 85 FR 27451 (May 8, 2020) (File No. 10-237) (order granting registration of MEMX LLC (“MEMX Exchange”))(“MEMX Order”); 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019) (File No. 10-234) (order granting registration of Long Term Stock Exchange, Inc. (“LTSE Exchange”) (“LTSE Order”); 79543 (Dec. 13, 2016), 81 FR 92901, 92903 (Dec. 20, 2016) (File No. 10-227) (order granting registration of MIAX PEARL, LLC) (“MIAX PEARL Order”); 68341 (Dec. 3, 2012), 77 FR 73065, 73067 (Dec. 7, 2012) (File No. 10-207) (order granting the registration of Miami International Securities Exchange, LLC (“MIAX Exchange”)) (“MIAX Order”); 58375 (Aug. 18, 2008), 73 FR 49498, 49501 (Aug. 21, 2008) (File No. 10-182) (order granting the registration of BATS Exchange, Inc.) (“BATS Order”); 53128 (Jan. 13, 2006), 71 FR 3550, 3553 (Jan. 23, 2006) (File No. 10-131) (granting the exchange registration of Nasdaq Stock Market, Inc.) (“Nasdaq Order”). In addition, the requirements that the number of Non-Industry Directors equal or exceed the sum of the number of Industry Directors and Member Representative Directors, that at least one Non-Industry Director shall also qualify as an Independent Director, and that at least one of the Non-Industry Directors shall be representative of issuers and investors and not associated with an Exchange Member, a broker, or a dealer on the 24X Board satisfy the requirements in section 6(b)(3) of the Exchange Act, 58 which requires in part that one or more directors be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer. The Commission previously has stated that the inclusion of public, non-industry representatives on exchange oversight bodies is an important mechanism to support an exchange's ability to protect the public interest. 59 Further, the presence of public, non-industry representatives can help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the exchange governance process. Public directors can provide unbiased perspectives, which may enhance the ability of the 24X Board to address issues in a non-discriminatory fashion and foster the integrity of the Exchange. 58 15 U.S.C. 78f(b)(3). 59 See, e.g., Sapphire Order, supra note 57, at 58850; MEMX Order, supra note 57, at 27452; LTSE Order, supra note 57, at 21843, MIAX PEARL Order, supra note 57, at 92903; MIAX Order, supra note 57, at 73067; BATS Order, supra note 57, at 49501; Nasdaq Order, supra note 57, at 3553. 2. Exchange Committees 24X has proposed to establish several named committees of the 24X Board, including an Appeals Committee 60 and a Regulatory Oversight Committee, 61 as well as the Nominating Committee and Member Nominating Committee, discussed above. 62 The Appeals Committee will consist of two Independent Directors and one Member Representative Director. 63 Each member of the Regulatory Oversight Committee must be an Independent Director. 64 60 See 24X LLC Agreement, Article VI, Section 6.2(f). The Appeals Committee will preside over all appeals related to disciplinary and adverse action determinations in accordance with 24X rules. Id. 61 See 24X LLC Agreement, Article VI, Section 6.2(h). The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of the Exchange's regulatory and self-regulatory organization responsibilities, assessing the Exchange's regulatory performance, and assisting the 24X Board and Committees in reviewing the regulatory plan and the overall effectiveness of the Exchange's regulatory functions. Id. See also infra section III.B.3. 62 The 24X Board could also establish additional committees. See 24X LLC Agreement, Article VI, Section 6.2(a). All committees of the 24X Board will be subject to the control and supervision of the 24X Board. Id. 63 See 24X LLC Agreement, Article VI, Section 6.2(f). 64 See 24X LLC Agreement Article VI, Section 6.2(h)(v). The named committees that 24X proposed, which are similar to the named committees maintained by other exchanges, 65 are designed to help enable the Exchange to carry out its responsibilities under the Exchange Act and are consistent with the Exchange Act, including section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Exchange Act. 66 65 See, e.g., Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016) (File No. 10-222) (order granting the registration of IEX (“IEX Order”)); Article IV, Section 4.1 of the Eleventh Amended and Restated Bylaws of Cboe Exchange, Inc. 66 15 U.S.C. 78f(b)(1). The Commission received one comment on Exhibit J of 24X's Form 1. 67 Regarding the proposed 24X Board and committees, this commenter stated that filling in the charts set forth in Exhibit J of 24X's Form 1 with “TBD” and “TO BE PROVIDED” “does not provide the Commission with sufficient information with which to assess compliance with the law or Commission Rules.” 68 The commenter further stated that “[t]he Exchange failed to provide the names, classifications, terms, and types of businesses of the persons to fill the required roles. The point of the chart is to have those boxes filled in. They are `to be provided' now—not in the future. What would be the basis for the Commission's approval?” 69 24X stated that it has not commenced operations and that “[o]nce directors and committee members are determined,” 24X will update its Form 1 as required under Rule 6a-2 under the Exchange Act. 70 67 See Healthy Markets Letter at 2-6. 68 Id. at 5. 69 Id. at 5. 70 See 24X Letter II at 16-17. Exhibit J requires certain information for officers, governors, members of all standing committees, or persons performing similar functions, who “presently hold or have held their offices or positions during the previous year.” 71 Exhibit J of 24X's Form 1 application indicates that Dmitri Galinov will be the “Industry/Chief Executive Officer” of 24X. Exhibit J also lists Dmitri Galinov as the Head of Equities for 24X, and other officers of 24X including David Sassoon as General Counsel; Jeremy Sanchez as Chief Regulatory Officer; and Jason Woerz as Chief Operating Officer. 71 For any individual that presently holds or has held their offices or positions during the previous year, Exhibit J requires their name, title, dates of commencement and termination of term of office or position, and type of business in which each is primarily engaged ( e.g., floor broker, specialist, odd lot dealer, etc.). 24X has not yet commenced operations, and therefore, the nomination and election processes to fill the rest of 24X's Board and committees, as set forth in the 24X LLC Agreement, have not been initiated. Upon approval of 24X's Form 1 application, however, 24X US, as the sole owner of 24X, is required to elect only those persons to the 24X Board and committees that meet the stated compositional requirements set forth in the 24X LLC Agreement, and pursuant to Rule 6a-2 of the Exchange Act, 24X must file an amendment to its Form 1 providing the name, classification, term, and type of business of each person who will be on the 24X Board and 24X committees within 10 days after 24X US elects such persons to the 24X Board, or the Chairman of the 24X Board appoints individuals to the various 24X committees. 72 The information provided by 24X in Exhibit J is consistent with the requirements of the form and the Exchange Act. 72 See 17 CFR 240.6a-2. See also 24X LLC Agreement, Article VI, Section 6.2(b)(i). B. 24X Bermuda and Regulation of the Exchange When 24X commences operations as a national securities exchange, it will have all of the attendant regulatory obligations under the Exchange Act. In particular, 24X will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in both the 24X and 24X Bermuda governing documents are designed to facilitate the ability of 24X to fulfill its regulatory obligations and to help facilitate Commission oversight of 24X. The discussion below summarizes some of these key provisions. 73 73 Because 24X US is the sole member of 24X ( see 24X LLC Agreement), and 24X Bermuda is the sole member of 24X US ( see 24X US LLC Agreement) and thus indirectly wholly owns and controls 24X, for purposes of this Order, the Commission bases its findings on provisions in the 24X Bermuda LLC Agreement, as the ultimate owner of 24X. 1. Ownership Structure; Ownership and Voting Limitations As stated above, 24X will be owned indirectly by 24X Bermuda. The 24X Bermuda LLC Agreement includes restrictions on the ability to own and vote units representing a fractional part of the interest in 24X Bermuda (“Units”). 74 These limitations are designed to prevent any party to the 24X Bermuda LLC Agreement from exercising undue control over the operation of the Exchange and to ensure that the Exchange and the Commission are able to carry out their regulatory obligations under the Exchange Act. 75 74 “Unit” means “(i) any Common Units (including Profits Units), Non-Voting Units or Preferred Units purchased or otherwise acquired by any Member; (ii) any equity securities issued or issuable directly or indirectly with respect to any of the foregoing Units by way of Unit distribution or split or in connection with a combination of Units, recapitalization, merger, consolidation or other reorganization; and (iii) any other units of any class or series of ownership interests of the Company held by a Member, including with respect to Convertible Securities or Options.” See 24X Bermuda LLC Agreement, Article 1, 1.72 75 These provisions are consistent with ownership and voting limits approved by the Commission for other SROs. See, e.g., Sapphire Order, MEMX Order, LTSE Order, MIAX PEARL Order, MIAX Order, and BATS Order supra note 57; IEX Order, supra note 65, see also Securities Exchange Release Nos. 6068 (Feb. 4, 2016) (File No. 10-221) (order granting exchange registration of ISE Mercury, LLC) (“ISE Mercury Order”); 70050 (July 26, 2013), 78 FR 46622, 46624 (Aug. 1, 2013) (File No. 10-209) (order granting the exchange registration of ISE Gemini, LLC) (“ISE Gemini Order”); 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (CBOE-2008-88) (Cboe demutualization order); 53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (NSX demutualization order); 51149 (Feb. 8, 2005), 70 FR 7531 (Feb. 14, 2005) (SR-CHX-2004-26) (CHX demutualization order); 49098 (Jan. 16, 2004), 69 FR 3974 (Jan. 27, 2004) (SR-Phlx-2003-73) (Phlx demutualization order). In particular, for so long as 24X Bermuda shall control, directly or indirectly, 24X, no Person, 76 either alone or together with its Related Persons, 77 will be permitted to own, directly or indirectly, of record or beneficially, more than 40% of the then issued and outstanding Units. 78 A more restrictive condition will apply to Exchange Members, who either alone or together with their Related Persons, will be prohibited from owning, directly or indirectly, of record or beneficially, more than 20% of the then issued and outstanding Units. 79 If any party to the 24X Bermuda LLC Agreement purports to transfer 80 any Units in violation of these ownership limits, 24X Bermuda will be required (to the extent funds are legally available) to redeem the Units in excess of the applicable ownership limit. 81 76 “Person” means “any individual, partnership, joint venture, company, limited liability company, trust, or other association or entity.” See 24X Bermuda LLC Agreement, Article 1, 1.41. 77 “Related Persons” means “[with] respect to any Person: (a) any `affiliate' of such Person (as such term is defined in Rule 12b-2 under the Exchange Act); (b) any other Person with which such first Person has any agreement, arrangement or understanding (whether or not in writing) to act together for the purpose of acquiring, voting, holding or disposing of Units; (c) in the case of a Person that is a company, corporation or similar entity, any executive officer (as defined under Rule 3b-7 under the Exchange Act) or director of such Person and, in the case of a Person that is a partnership or limited liability company, any general partner, managing member or manager of such Person, as applicable; (d) in the case of any Person that is a registered broker or dealer that has been admitted to membership in the national securities exchange known as 24X National Exchange, any Person that is associated with such member (as determined using the definition of `person associated with a member' as defined under Section 3(a)(21) of the Exchange Act); (e) in the case of a Person that is a natural person and member of 24X National Exchange, any broker or dealer that is also a member of 24X National Exchange with which such Person is associated; (f) in the case of a Person that is a natural person, any relative or spouse of such Person, or any relative of such spouse who has the same home as such Person or who is a manager or officer of the Company, any subsidiary of the Company, or any of the Company's parent companies; (g) in the case of a Person that is an executive officer (as defined under Rule 3b-7 under the Exchange Act) or a director of a company, corporation or similar entity, such company, corporation or entity, as applicable; or (h) in the case of a Person that is a general partner, managing member or manager of a partnership or limited liability company, such partnership or limited liability company, as applicable.” See 24X Bermuda LLC Agreement, Article 1, 1.49. 78 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(a)(i). There are limited exceptions to these prohibitions. See infra notes 84-85 and accompanying text. 79 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(a)(ii). This restriction on ownership by Exchange Members cannot be waived. See id. at Article 9, Section 9.2(b)(ii). 80 “Transfer” means “any sale, transfer, conveyance, exchange, pledge, gift, donation, assignment, or other disposition of Units, whether voluntary or involuntary, and whether during the lifetime of the Person involved or upon or after his death, including, but not limited to, any disposition by operation of law, by court order, by judicial process, or by foreclosure, levy, or attachment. `Transfer' when used as a verb shall have a correlative meaning. `Transferor' and `Transferee' mean a Person who makes or receives a Transfer, respectively.” See 24X Bermuda LLC Agreement, Article 1, Section 1.71. See also id. at Article 9, Section 9.2(f)(i). 81 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(f)(iii). The price of the redeemed Units or Unit Equivalents is also prescribed in the 24X Bermuda LLC Agreement. See id. The number of Units or Unit Equivalents to be redeemed is to be calculated after taking into account that the redeemed Units or Unit Equivalents will become treasury shares and will no longer be deemed to be outstanding. See id. It is further provided in the 24X Bermuda LLC Agreement that any Units or Unit Equivalents that have been called for redemption may not be deemed outstanding Units or Unit Equivalents if a sum sufficient to redeem the Units or Unit Equivalents has been irrevocably deposited or set aside to pay the redemption price. From and after the redemption date (unless 24X Bermuda defaults in providing funds for the payment of the redemption price), the redeemed Units or Unit Equivalents that have been redeemed will become treasury shares, and all rights of the holder of the redeemed Units or Unit Equivalents in 24X Bermuda (except the right to receive from 24X Bermuda the redemption price against delivery to 24X Bermuda of evidence of ownership of the shares) will cease. See id. In addition, in the event that any redemption has resulted in any person owning such number of Units or Unit Equivalents that is in violation of the ownership limits, 24X Bermuda will be required to redeem those Units or Unit Equivalents pursuant to the limitation provisions. See id. In addition, no Person, alone or together with its Related Persons, may, directly, indirectly, or pursuant to any voting trust, agreement, plan or other arrangement, vote or cause the voting of Units or give any consent or proxy with respect to Units representing more than 20% of the voting power of the then issued and outstanding Units (“Voting Limitation”). 82 Further, no Person, either alone or together with its Related Persons, under circumstances that would result in the Units that are subject to such agreement, plan, or other arrangement not being voted on any matter or matters or any proxy relating thereto being withheld, where the effect of such agreement, plan, or other arrangement would be to enable any Person, either alone or together with its Related Persons, to vote, possess the right to vote, or cause the voting of Units that would represent more than 20% of such voting power. 83 82 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(a)(iii). 83 See id. The 24X Bermuda Board of Managers will be permitted to waive the 40% ownership limitation and the 20% Voting Limitation pursuant to a resolution duly adopted by the 24X Bermuda Board of Managers if it makes certain determinations. 84 Any such waiver will not be effective unless and until approved by the Commission. 85 84 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(b)(ii). See also supra note 79 (concerning the inability to waive restrictions for Exchange Members). The required determinations are that such waiver will not impair the ability of the Exchange to carry out its functions and responsibilities as an “exchange” under the Exchange Act and the rules and regulations promulgated thereunder; that such waiver is otherwise in the best interests of 24X Bermuda, its members, and the Exchange; that such waiver will not impair the ability of the Commission to enforce the Exchange Act and the rules and regulations promulgated thereunder; and that such Person and its Related Persons are not subject to any applicable “statutory disqualification” within the meaning of Section 3(a)(39) of the Exchange Act. See id. See also 24X US LLC Agreement, Section III(b)(ii)(B). These provisions are consistent with ownership and voting limits approved by the Commission for other SROs. See, e.g., Sapphire Order, MEMX Order, LTSE Order, MIAX PEARL Order, MIAX Order, and BATS Order, supra note 57, IEX Order, supra note 65, ISE Mercury Order and ISE Gemini Order, supra note 75; and Securities Exchange Act Release No. 61698 (Mar. 12, 2010), 75 FR 13151 (Mar. 18, 2010) (File Nos. 10-194 and 10-196) (order approving DirectEdge exchanges) (“DirectEdge Exchanges Order”). 85 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(b)(ii). Any Person that proposes to own Units in excess of the 40% ownership limitation, or to vote or grant any proxies or consents with respect to Units constituting more than 20% of the voting power of the then outstanding Units, will be required to deliver written notice to the 24X Bermuda Board of Managers of its intention. 86 The notice must be delivered to the 24X Bermuda Board of Managers not less than 45 days (or any shorter period to which the Board of Managers expressly consents) before the proposed ownership of such Units or the proposed vote. 87 86 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(d). 87 See id. The 24X Bermuda LLC Agreement also contains provisions that are designed to further safeguard the ownership limitation and Voting Limitation described above or are otherwise related to direct and indirect changes in control. Specifically, any Person that, either alone or together with its Related Persons beneficially owns, directly or indirectly (whether by acquisition or a change in the number of Units outstanding), of record or beneficially 5% or more of the then outstanding Units will be required to notify the 24X Bermuda Board of Managers in writing of such ownership. 88 Thereafter, such persons will be required to update 24X Bermuda of any increase or decrease of 1% or more in their previously reported ownership percentage. 89 88 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(e)(i). The notice will require the Person's full legal name; the Person's title or status and the date on which such title or status was acquired; the Person's and its Related Person's) approximate ownership interest in 24X Bermuda; and whether the person has power, directly or indirectly, to direct the management or policies of 24X Bermuda, whether through ownership of securities, by contract or otherwise. See id. 89 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(e)(ii). Changes of less than 1% must also be reported to 24X Bermuda if they result in such Person crossing a 20% or 40% ownership threshold. See id. In addition, the Exchange's rules also impose limits on affiliation between the Exchange and a Member of the Exchange. See 24X Rule 2.10 (No Affiliation between Exchange and any Member). The 24X LLC Agreement does not include change of control provisions that are similar to those in the 24X Bermuda LLC Agreement and the 24X US LLC Agreement because the 24X LLC Agreement instead explicitly identifies its sole owner as 24X US, and in turn the 24X US LLC Agreement explicitly identifies 24X Bermuda as its sole owner. 90 Thus, any changes in the ownership of 24X would require the 24X LLC Agreement to be amended. Any amendment to the 24X LLC Agreement, including to ownership of 24X, would constitute a proposed rule change under section 19(b) of the Exchange Act 91 and Rule 19b-4 92 thereunder that will be required to be filed with, or filed with and approved by, the Commission. 93 Moreover, pursuant to the 24X LLC Agreement, any transfer of limited liability company interests of 24X will be subject to prior approval by the Commission pursuant to the rule filing procedure under section 19 of the Exchange Act. 94 90 See 24X LLC Agreement (introductory text) and Second Amended and Restated Limited Liability Company Agreement of 24X US (introductory text). 91 15 U.S.C. 78s(b). 92 17 CFR 240.19b-4. 93 See 24X LLC Agreement, Article X, Section 10.3. 94 See 24X LLC Agreement, Article V, Section 5.2(a). Although 24X Bermuda is not directly responsible for regulation, its activities with respect to the operation of 24X must be consistent with, and must not interfere with, the self-regulatory obligations of 24X. 95 As described above, the provisions applicable to changes in control of 24X Bermuda (through changes in ownership of Units in 24X Bermuda) as well as the Voting Limitation imposed on owners of 24X Bermuda who also are Exchange Members, are designed to help prevent any owner of 24X Bermuda from exercising undue influence or control, either direct or indirect, over the operation of the Exchange and to help ensure that the Exchange retains a sufficient degree of independence to effectively carry out its regulatory obligations under the Exchange Act. 95 See, e.g., Sapphire Order, supra note 57, IEX Order, supra note 65. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. As the Commission has stated in the past, an exchange member's ownership interest in an entity that controls an exchange could become so large as to cast doubt on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member. 96 An exchange member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member's conduct or diligently enforce the exchange's rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, these requirements are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of the Exchange to effectively carry out its regulatory oversight responsibilities under the Exchange Act. 96 See, e.g., Sapphire Order, MEMX Order, LTSE Order, MIAX PEARL Order, MIAX Order, and BATS Order, supra note 57, ISE Mercury Order, supra note 75, IEX Order, supra note 65; and DirectEdge Exchanges Order, supra note 84. The Commission received one comment addressing the governance structure proposed by 24X. 97 This commenter stated 24X's ownership and voting structure “facially violate Commission Rules and the law.” 98 According to this commenter “[24X] asserts that if the Commission approves its application, it has internal company documents that promise (to itself) that it will come into compliance with the law and Commission Rules within nine months of the approval. It is unclear whether or how this promise for future compliance would be enforceable, much less by whom.” 99 97 See Healthy Markets Letter at 2-6. 98 Id. at 2. 99 Id. In response to the commenter's concern about 24X's ownership and voting structure, 24X explained that “although the Exchange Act does not set forth any specific ownership and voting limitations applicable to exchanges, the Commission typically has expected exchanges to include in their governing documents certain limitations on ownership and voting. 24X's application includes each of these typical limitations on ownership and voting.” 100 24X stated that “[t]he only exception to such limitations is a request for a very brief, temporary exemption from certain ownership and voting limitation[s].” 101 100 24X Letter II at 16. 101 Id. See also infra section III.B.1.a. 24X's and 24X Bermuda's proposed governance provisions are consistent with the Exchange Act, including section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Exchange Act. 102 In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or 24X to effectively carry out their regulatory oversight responsibilities under the Exchange Act. 102 15 U.S.C. 78f(b)(1). 24X has proposed ownership and voting limitations in Article 9, Section 9.2 of the 24X Bermuda LLC Agreement that are consistent with the ownership and voting limitations in place across all other national securities exchanges, 103 and thus are designed to enable 24X to meet its obligations under the Exchange Act. 103 See supra note 75. a. Temporary Exemption 24X proposes that Dmitri Galinov and his Related Persons 104 have a temporary exemption from the ownership limitation set forth in Section 9.2 of the 24X Bermuda LLC Agreement until nine (9) months after the Commission grants 24X's application for registration as a national securities exchange or until 24X commences operation, if later than nine (9) months. 105 Further, 24X proposes in the 24X Bermuda LLC Agreement that if Dmitri Galinov and his Related Persons do not comply with the ownership limitation in Section 9.2 of the 24X Bermuda LLC Agreement within the applicable time period, then 24X Bermuda shall redeem all of the Units the holding of which by Dmitri Galinov and/or his Related Persons results in a violation of Section 9.2 for a price per Unit, as applicable, equal to the lesser of (a) book value or (b) Fair Market Value of such Units. 106 24X also proposes that Dmitri Galinov and his Related Persons shall have a temporary exemption from the Voting Limitation set forth in Section 9.2 of the 24X Bermuda LLC Agreement until nine (9) months after the Commission grants 24X's application for registration as a national securities exchange or until 24X commences operation, if later than nine (9) months, but only with respect to any vote regarding any merger, consolidation or dissolution of the 24X Bermuda or any sale of all or substantially all of the assets of the 24X Bermuda. 107 104 See infra notes 108-110 and accompanying text for a description of the Related Persons of Dmitri Galinov. 105 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(g)(i). While 24X Bermuda LLC Agreement, Article 9, Section 9.2(a)(ii) sets forth an ownership restriction that applies to 24X Exchange Members, this provision does not apply to Mr. Galinov; the ownership limitation that does apply to Dmitri Galinov and his Related Persons is set forth in 24X Bermuda LLC Agreement, Article 9, Section 9.2(a)(i). 106 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(g)(i). 107 See 24X Bermuda LLC Agreement, Article 9, Section 9.2(g)(ii). Exhibit K of 24X's Form 1 application provides that “Dmitri Galinov owns 7,000,000 Common Units and 179,215 Seed-3 Preferred Units, for a total of 7,179,215 Units for all classes outstanding,” 108 and that “Dmitri Galinov is a Related Person of KNG CAPITAL LLC, Tanya Nazarov-Kenneally, and Vladimir Nazarov. KNG CAPITAL LLC owns 320,616 Seed-1 Preferred Units, which represents 1.85% of all classes of outstanding Units. Tanya Nazarov-Kenneally owns 1794 Seed-3 Preferred Units, which represents 0.01% of all classes of outstanding Units. Vladimir Nazarov owns 7176 Seed-3 Preferred Units, which represents 0.04% of all classes of outstanding Units.” 109 Accordingly, Exhibit K states that “on an aggregate basis, Dmitri Galinov, together with his Related Persons, owns 43.29% of the Units of all classes of outstanding Units.” 110 108 See Exhibit K, footnote 2. 109 Id. 110 Id. In a letter, 24X stated that the temporary exemption would provide it with a brief period to bring its ownership and voting structure in line with the ownership and voting restrictions upon SEC approval. 111 24X also stated that the Commission had granted “prior exchange applications with such limited exceptions to the ownership and voting restrictions.” 112 111 See 24X Letter II at 16. 112 Id. 24X cited Securities Exchange Act Release No. 42455 (Feb. 24, 2000) as support for its statement. The Commission finds that the limited temporary exemption in Article 9, Section 9.2(g) of the 24X Bermuda LLC Agreement from the ownership limitation and Voting Limitation set forth in Article 9, Section 9.2 of the 24X Bermuda LLC Agreement for Dmitri Galinov and his Related Persons is consistent with the Exchange Act. As discussed above, the ownership limitation and Voting limitation are designed to prevent any party from exercising undue control over the operation of the 24X and ensure that 24X is able to carry out its regulatory obligations under the Exchange Act. The exemption is designed to prevent Dmitri Galinov and his Related Persons from exercising undue control over 24X and minimize the possibility that 24X's ability to carry out its self-regulatory responsibilities under the Exchange Act could be impaired. Specifically, the exemption is for a defined period of time that is based on 24X's approval as a national securities exchange or commencement of its exchange operations. Thus, the exemption is designed to ensure that once 24X is a self-regulatory organization (“SRO”), the exemption will terminate within a specified period of time. In addition, the exemption from the Voting Limitation applies only with respect to the limited situations involving any merger, consolidation or dissolution of the 24X Bermuda or any sale of all or substantially all of the assets of the 24X Bermuda that will not permit undue control over 24X or impair the regulatory responsibilities of 24X. The temporary exemption is designed to afford Dmitri Galinov and his Related Persons the ability to protect the investment they have already made in the establishment of 24X that is over the current ownership limitation, represented by 24X to be 3.29% of the Units of all outstanding Units. 113 113 See Exhibit K, footnote 2. The Commission has approved other temporary exemptions from the ownership or voting limitations included in the governance documents of owners of a national securities exchange. See Securities Exchange Act Release No. 49067 (Jan. 13, 2004), 69 FR 2761 (Jan. 20, 2004) (order granting approval to a proposed rule change by the Boston Stock Exchange Inc. Relating to the LLC Operating Agreement of the Proposed New Exchange Facility to be Operated by the Boston Options Exchange Group LLC)(approval of an exemption from a voting limitation for a period of 10 years for an owner of the BOX facility). See also Securities Exchange Act Release No. 42455 (Feb. 24, 2000), 65 FR 11388 (Mar. 2, 2000) (File No. 10-127) (order granting registration of the International Securities Exchange LLC)(approval of an exemption from an ownership limitation for period of 10 years for certain founders of the exchange). As part of its Form 1 application, 24X also has included in the 24X Bermuda LLC Agreement a representation that 24X Bermuda will redeem all of the Units the holding of which by Dmitri Galinov and/or his Related Persons results in a violation of the applicable 40% ownership limitation for a price per Unit, as applicable, equal to the lesser of (a) book value or (b) Fair Market Value of such Units. The 24X Bermuda LLC Agreement further provides that such redemption shall occur nine (9) months after the date of approval by the Commission of 24X's Form 1 application or until commencement of the operation of 24X, if later than nine (9) months. Thus, in response to the commenter, 24X has established a mechanism to ensure compliance with the ownership limitation and Voting Limitation set forth in the 24X Bermuda LLC Agreement upon expiration of the stated time period. 24X Bermuda's Managers and officers must comply with the federal securities laws and the rules and regulations promulgated thereunder and are deemed to agree to cooperate with the Commission and 24X in respect of the Commission's oversight responsibilities regarding 24X and the self-regulatory functions and responsibilities of 24X. 114 Therefore, should there be a need to pursue enforcement of the redemption requirement required of 24X Bermuda, 24X Bermuda's Managers and officers must comply with the obligation and must cooperate with those efforts by the Commission and 24X to ensure that such redemption occurs. Finally, should 24X Bermuda not redeem the Units owned by Dmitri Galinov and his Related Persons within the specified time period, the Commission may take action against 24X under section 19(h) of the Exchange Act. 115 114 See 24X Bermuda LLC Agreement, Article 3, Section 3.4(b). 115 See infra Section III.B.2. 2. Regulatory Independence and Oversight Although 24X Bermuda will not itself carry out regulatory functions, its activities with respect to the operation of 24X must be consistent with, and must not interfere with, 24X's self-regulatory obligations. In this regard, 24X and 24X Bermuda propose to adopt certain provisions in their respective governing documents that are designed to help maintain the independence of the regulatory functions of 24X. These proposed provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration. 116 Specifically: 116 See, e.g., Sapphire Order, MEMX Order, LTSE Order, MIAX Order, supra note 57, IEX Order, supra note 65; and DirectEdge Exchanges Order, supra note 84. • the managers, officers, employees, and agents of 24X Bermuda must give due regard to the preservation of the independence of the self-regulatory function of 24X and to its obligations to investors and the general public and must not take actions which would interfere with the effectuation of decisions by the Exchange Board relating to its regulatory functions (including disciplinary matters) or which would interfere with 24X's ability to carry out its responsibilities under the Exchange Act. 117 117 See 24X Bermuda LLC Agreement, Article 3, Section 3.4(a). Similarly, Article VI, Section 6.1(a)(ii) of the 24X LLC Agreement requires the Exchange Board and each Director, when managing the business and affairs of 24X, to consider the requirements of Section 6(b) of the Exchange Act and requires each Director, officer, or employee of 24X to comply with the federal securities laws and regulations thereunder and cooperate with the Commission, and 24X pursuant to its regulatory authority. Article VI, Section 6.1(a)(iii) of the 24X LLC Agreement also requires the Exchange Board, when evaluating any proposal to take into account all factors that the Exchange Board deems relevant, including, without limitation, to the extent deemed relevant: the potential impact on the integrity, continuity and stability of the national securities exchange operated by 24X and the other operations of 24X, on the ability to prevent fraudulent and manipulative acts and practices, and on investors and the public, and whether such proposal would promote just and equitable principles of trade, foster cooperation and coordination with Persons engaged in regulating, clearing, settling, processing information with respect to and facilitating transactions in securities or assist in the removal of impediments to or perfection of the mechanisms for a free and open market and a national market system. • 24X Bermuda must comply with the federal securities laws and the rules and regulations promulgated thereunder, and must cooperate with the Commission, 24X, Financial Industry Regulatory Authority, Inc. (“FINRA”), and any other SRO of which any routing broker for 24X is a member, pursuant to and to the extent of their respective regulatory authority. 118 In addition, 24X Bermuda's managers, officers, employees, and agents must comply with the federal securities laws and the rules and regulations promulgated thereunder and are deemed to agree to cooperate with: (1) the Commission and 24X in respect of the Commission's oversight responsibilities regarding 24X and the self-regulatory functions and responsibilities of 24X; and (2) FINRA, any other SROs of which any routing broker of 24X is a member, and any routing broker of 24X in respect of FINRA's and any such other SRO's oversight responsibilities regarding any routing broker of 24X, as applicable. 119 24X Bermuda shall take reasonable steps necessary to cause its managers, officers, employees and agents to so cooperate. 120 118 See 24X Bermuda LLC Agreement, Article 3, Section 3.4(b). 119 See id. 120 See id. • 24X Bermuda, and its managers, officers, employees, and agents must submit to the jurisdiction of the U.S. federal courts, the Commission, and 24X, for purposes of any suit, action or proceeding pursuant to the U.S. federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, 24X activities. 121 121 See 24X Bermuda LLC Agreement, Article 3, Section 3.4(c). • All books and records of 24X reflecting confidential information pertaining to the self-regulatory function of 24X (including but not limited to disciplinary matters, trading data, trading practices, and audit information) must be retained in confidence by 24X and its personnel, including its Directors, officers, employees, and agents, and will not be used by 24X for any non-regulatory purposes and shall not be made available to any person (including, without limitation, any Exchange Member) other than personnel of the SEC, and those personnel of 24X, members of Committees, members of the 24X Board, hearing officers and other agents of 24X to the extent necessary or appropriate to properly discharge the self-regulatory responsibilities of 24X. 122 Similar provisions apply to 24X Bermuda and its personnel, managers, officers, employees, and agents. 123 122 See 24X LLC Agreement, Article IX, Section 9.2. 123 The 24X Bermuda LLC Agreement provides that all books and records of 24X reflecting confidential information pertaining to the self-regulatory function of 24X that come into the possession of 24X Bermuda, and the information contained in those books and records, will be subject to confidentiality restrictions and will not be used for any non-regulatory purposes. See 24X Bermuda LLC Agreement, Article 12, Section 12.2(c). The 24X and 24X Bermuda governing documents acknowledge that requirements to keep such information confidential shall not limit or impede the rights of the Commission to access and examine such information or limit the ability of Directors, Officers, employees, or agents of 24X to disclose such information to the Commission, or the manager, officers, employees or agents of 24X Bermuda to disclose such information to the Commission or 24X. See 24X LLC Agreement, Article IX, Section 9.2 and 24X Bermuda LLC Agreement, Article 12, Section 12.2(c). • The books and records of 24X and 24X Bermuda must be maintained in the United States 124 and, to the extent they are related to the operation or administration of 24X, 24X Bermuda's books and records will be subject at all times to inspection and copying by the Commission and 24X. 125 124 See 24X LLC Agreement, Article IX, Section 9.2; and 24X Bermuda LLC Agreement, Article 12, Section 12.2(b). 125 See 24X Bermuda LLC Agreement, Article 12, Section 12.2(b). • Furthermore, to the extent 24X Bermuda's corporate, financial and similar records, reports and documents, including all financial statements, books and records and minutes of proceedings, are related to the activities of 24X, such corporate, financial and similar records, reports and documents, including all financial statements, books and records and minutes of proceedings, as well as premises, managers, officers, employees and agents of 24X Bermuda shall be deemed to be the corporate, financial and similar records, reports and documents, including all financial statements, books and records and minutes of proceedings, as well as premises, managers, officers, employees or agents, as applicable, of 24X for the purposes of, and subject to oversight pursuant to, the Exchange Act. 126 126 See 24X Bermuda LLC Agreement, Article 12, Section 12.2(a). • 24X Bermuda will take reasonable steps necessary to cause its manager, officers, employees, and agents, prior to accepting a position as a manager, officer, employee or agent (as applicable) with 24X Bermuda to consent in writing to the applicability of provisions regarding non-interference, confidentiality, books and records, compliance and cooperation, jurisdiction, and regulatory obligations, with respect to their activities related to 24X. 127 127 See 24X Bermuda LLC Agreement, Article 3, Section 3.2. • The 24X Bermuda LLC Agreement requires that, so long as 24X Bermuda controls 24X, any changes to that document must be submitted to the Exchange Board for approval, and, if such change is required to be filed with the Commission pursuant to section 19(b) of the Exchange Act and the rules and regulations thereunder, such change shall not be effective until filed with and effective by operation of law, or filed with, and approved by, the Commission. 128 128 See 24X Bermuda LLC Agreement, Article 12, Section 12.10(b). The provisions discussed in this section, which are designed to help ensure the independence of 24X's regulatory function and facilitate the ability of 24X to carry out its regulatory responsibilities under, and operate in a manner consistent with, the Exchange Act, are appropriate and consistent with the requirements of the Exchange Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Exchange Act. 129 129 15 U.S.C. 78f(b)(1). Further, section 19(h)(1) of the Exchange Act 130 provides the Commission with the authority “to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of the Exchange Act, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance . . . ” with any such provision by its members (including associated persons thereof). If the Commission were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Exchange Act, including without limitation sections 6(b)(1) and 19(g)(1), 131 these matters could provide the basis for a disciplinary proceeding under section 19(h)(1) of the Exchange Act. 132 130 See 15 U.S.C. 78s(h)(1). 131 15 U.S.C. 78f(b)(1); 15 U.S.C. 78s(g)(1). 132 15 U.S.C. 78s(h)(1). Even in the absence of the governance provisions described above, under section 20(a) of the Exchange Act, 133 any person with a controlling interest in 24X would be jointly and severally liable with and to the same extent that 24X is liable under any provision of the Exchange Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. In addition, section 20(e) of the Exchange Act 134 creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Exchange Act or rule thereunder. Further, section 21C of the Exchange Act 135 authorizes the Commission to enter a cease-and-desist order against any person who has been “a cause of” a violation of any provision of the Exchange Act through an act or omission that the person knew or should have known would contribute to the violation. These provisions are applicable to 24X Bermuda. 133 15 U.S.C. 78t(a). 134 15 U.S.C. 78t(e). 135 15 U.S.C. 78u-3. 3. Regulatory Oversight Committee The regulatory operations of 24X will be monitored by the Regulatory Oversight Committee of the Exchange Board. As mentioned above, the Regulatory Oversight Committee will consist only of Independent Directors. 136 The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of 24X's regulatory and SRO responsibilities, assessing 24X's regulatory performance, and assisting the 24X Board (and committees of the 24X Board) in reviewing 24X's regulatory plan and the overall effectiveness of 24X's regulatory functions. 137 136 See supra note 61 and accompanying text. 137 See 24X LLC Agreement, Article VI, Section 6.2(h)(i). Further, the Chief Regulatory Officer (“CRO”) of 24X will have general supervision over 24X's regulatory operations, including responsibility for overseeing 24X's surveillance, examination, and enforcement functions and for administering any regulatory services agreements with another SRO to which 24X is a party. 138 The Regulatory Oversight Committee, in consultation with the Chief Executive Officer of 24X, will be responsible for establishing the goals, assessing the performance, and fixing the compensation of the CRO and for recommending personnel actions involving the CRO and senior regulatory personnel. 139 138 See 24X LLC Agreement, Article VIII, Section 8.5. 139 See 24X LLC Agreement, Article VI, Section 6.2(h)(iii). To the extent that the Chief Executive Officer of 24X has any indirect supervisory responsibility for the role or function of the CRO, including implementation of the budget for the regulatory function or regulatory personnel matters, the Regulatory Oversight Committee shall take all steps reasonably necessary to ensure that the Chief Executive Officer does not compromise the regulatory autonomy and independence of the Chief Regulatory Officer or the regulatory function. See 24X LLC Agreement, Article VI, Section 6.2(h)(4). C. Regulatory Funding and Services As a prerequisite for the Commission's granting of an exchange's application for registration, an exchange must be organized and have the capacity to carry out the purposes of the Exchange Act. 140 Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the federal securities laws and rules thereunder and the rules of the exchange. 141 The discussion below summarizes how 24X proposes to conduct and structure its regulatory operations. 140 See 15 U.S.C. 78f(b)(1). 141 See id. See also Section 19(g) of the Exchange Act, 15 U.S.C. 78s(g). 1. Regulatory Funding To help ensure that 24X has and will continue to have adequate funding to be able to meet its responsibilities under the Exchange Act, 24X stated that, if the Commission approves 24X's application for registration as a national securities exchange, 24X Bermuda, through 24X US, will allocate sufficient assets to 24X to enable the Exchange's operation. 142 Specifically, 24X stated that 24X Bermuda shall make prior to the launch of the Exchange a cash contribution of $5 million (in addition to any previously provided in-kind contributions, such as legal, regulatory, and infrastructure-related services) to 24X US. In turn, 24X US will make a corresponding cash contribution of $5 million (in addition to any previously provided in-kind contributions, such as legal, regulatory, and infrastructure-related services) to the Exchange. The Exchange represented that such cash and in-kind contributions will be adequate to operate the Exchange, including the regulation of the Exchange. 143 142 See Form 1, Exhibit I. 143 See id. 24X also represented that there will be a written agreement among 24X Bermuda, 24X US and 24X that requires 24X Bermuda and 24X US to provide adequate funding for the Exchange's operations, including the regulation of the Exchange. 144 Further, 24X stated that the agreement will provide that 24X will receive all fees, including regulatory fees and trading fees payable by the Exchange's members as well as any funds received from any market data fees and tape revenue. In addition, the agreement will provide that 24X Bermuda and 24X US will reimburse 24X for its costs and expenses to the extent that 24X's assets are insufficient to meet its costs and expenses. 144 See id. Further, the 24X LLC Agreement requires that any Regulatory Funds received by 24X shall not be used for non-regulatory purposes or distributed, advanced or allocated to any Company Member, 145 but rather, shall be applied to fund regulatory operations of the 24X (including surveillance and enforcement activities), or, as the case may be, shall be used to pay restitution and disgorgement of funds intended for customers. 146 Excess non-regulatory funds, as solely determined by the 24X, will be remitted to 24X US in accordance with the 24X LLC Agreement. 147 145 Under the 24X LLC Agreement, the Company Member is 24X US. 146 See 24X LLC Agreement, Article XI, Section 11.4(b). “Regulatory Funds” in the 24X LLC Agreement means “fees, fines or penalties derived from the regulatory operations of the Company. “Regulatory Funds” shall not be construed to include revenues derived from listing fees, market data revenues, transaction revenues, or any other aspect of the commercial operations of the Company, even if a portion of such revenues are used to pay costs associated with the regulatory operations of the Company.” Article I, ll of the 24X LLC Agreement. This definition is consistent with the rules of other SROs. See, e.g., LTSE Bylaws, Article I(bb); Amended and Restated By-Laws of MIAX Exchange, Article 1(ll); By-Laws of NASDAQ PHLX LLC, Article I(ii); By-Laws of NASDAQ BX, Inc., Article I(ii). See also 24X Rule 15.2. 147 See Form 1, Exhibit I. One commenter stated that 24X did not provide audited financial statements. 148 24X stated that it believed that it complied with the requirements of Exhibit I regarding financial statements because while 24X has been formed it has not commenced operations and does not have audited financial statements for any fiscal year. 149 24X also stated that the approach it has taken with regard to Exhibit I is consistent with prior exchange applications that have been approved by the SEC based on the same provided information. 150 148 See Healthy Markets Letter at 2. 149 See 24X Letter II at 16. 150 Id. The 24X Form 1 provides the Commission with information necessary to make a finding that 24X will operate consistent with its obligations under the Exchange Act. 151 24X has filed financial information about how it intends to fund its operations and has filed financial information in Exhibit D about its owners, 24X Bermuda and 24X US. Exhibit I of Form 1 requires that the applicant submit “[f]or the latest fiscal year of the applicant, audited financial statements which are prepared in accordance with, or in the case of a foreign applicant, reconciled with, United States generally accepted accounting principles, and are covered by a report prepared by an independent public accountant.” 152 24X has not provided audited financial statements nor the report prepared by an independent public accountant because, as it stated in the Form 1, the “Exchange has been formed but has not commenced operations and does not yet have audited financial statements for any fiscal year.” 153 As stated in the instructions for Form 1, “Form 1 is designed to enable the Commission to determine whether an exchange applying for registration is in compliance with the provisions of sections 6 154 and 19 155 of the Exchange Act.” 156 In this case, the applicant exchange has no past operations or activity. Moreover, the Commission has approved prior Form 1 applications with similar circumstances. 157 In addition, pursuant to Rule 6a-2(b)(1) of the Exchange Act, 158 as a registered national securities exchange, 24X must file an amendment to its Form 1 application. Exhibits D and I must be filed on or before June 30 of each year and include audited financial information as of the end of the latest fiscal year of the Exchange; thus, the Commission and the public will be informed of 24X's financial activity going forward. 159 151 15 U.S.C. 78f(b)(1). 152 17 CFR 249.1. 153 See Form 1, Exhibit I. 154 15 U.S.C. 78f. 155 15 U.S.C. 78s. 156 17 CFR 249.1. 157 See e.g., Exhibit I for MIAX Sapphire, LLC Form 1 Application and Exhibits, available at https://www.sec.gov/files/rules/other/2023/exhibit-i.pdf (stating that applicant MIAX Sapphire, LLC has been formed but has not commenced operations and does not yet have audited financial statements for any fiscal year); Exhibit I for MEMX LLC Form 1 Application and Exhibits, available at https://www.sec.gov/files/rules/other/2019/memx/exhibit-i.pdf (stating that applicant MEMX LLC has been formed but has not commenced operations and so does not yet have audited financial statements for any fiscal year). 158 17 CFR 240.6a-2(b)(1). 159 Form 1 filings are made available to the public. See Securities Exchange Act Release No. 97182 (Mar. 22, 2023), 88 FR 23920, 23928 (Apr. 18, 2023). 2. Regulatory Contract With FINRA Although 24X will be an SRO with all of the attendant regulatory obligations under the Exchange Act, it has represented to the Commission that it intends to enter into a regulatory services agreement (“RSA”) with FINRA, under which FINRA as a regulatory services provider will perform certain regulatory functions on 24X's behalf. 160 Specifically, 24X expects that such services will include the performance of investigation, disciplinary, and hearing services. 161 Notwithstanding the RSA, 24X will retain legal responsibility for the regulation of its members and its market and the performance of FINRA as its regulatory services provider. Because 24X anticipates entering into an RSA with FINRA, it has not made provisions to fulfill the regulatory services that will be undertaken by FINRA. Accordingly, the Commission is conditioning the operation of 24X on a final RSA that specifies the services that will be provided to 24X. 160 See Form 1, Exhibit L. See also 24X Rules 9.8 and 13.7. 161 See Form 1, Exhibit L. It is consistent with the Exchange Act for 24X to contract with FINRA to perform certain examination, enforcement, and disciplinary functions. 162 These functions are fundamental elements of a regulatory program and constitute core self-regulatory functions. FINRA has the expertise and experience to perform these functions for 24X. 163 However, 24X, unless relieved by the Commission of its responsibility, bears the self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on 24X's behalf. 164 In performing these regulatory functions, however, FINRA may nonetheless bear liability for causing or aiding and abetting the failure of 24X to perform its regulatory functions. 165 Accordingly, although FINRA will not act on its own behalf under its SRO responsibilities in carrying out these regulatory services for 24X, FINRA may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws or rules thereunder by 24X. 166 162 For example, LTSE, MEMX Exchange, IEX, MIAX Exchange, MIAX PEARL, LLC, Nasdaq MRX, LLC, Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc. (“Cboe EDGX”), and Cboe BZX Exchange, Inc. (“Cboe BZX”) have entered into RSAs with FINRA. 163 See, e.g., MEMX Order, supra note 57; LTSE Order, supra note 57; IEX Order, supra note 65; DirectEdge Exchanges Order, supra note 84; Nasdaq Order, supra note 57. The Commission is not approving the RSA or any of its specific terms. 164 See 15 U.S.C. 78s(g)(1). 165 For example, if failings by FINRA have the effect of leaving 24X in violation of any aspect of 24X's self-regulatory obligations, 24X would bear direct liability for the violation, while FINRA may bear liability for causing or aiding and abetting the violation. See, e.g., MEMX Order, supra note 57; LTSE Order, supra note 57; IEX Order, supra note 65; Nasdaq Order, supra note 57; BATS Order, supra note 57; DirectEdge Exchanges Order, supra note 84. 166 See, e.g., MEMX Order, supra note 57; LTSE Order, supra note 57; IEX Order, supra note 65; and Nasdaq Order, supra note 57. 3. Rule 17d-2 Agreements Section 19(g)(1) of the Exchange Act, 167 among other things, requires every SRO registered as either a national securities exchange or national securities association to comply with the Exchange Act, the rules and regulations thereunder, and the SRO's own rules, and, absent reasonable justification or excuse, enforce compliance by its members and persons associated with its members. 168 Rule 17d-2 of the Exchange Act permits SROs to propose joint plans to allocate regulatory responsibilities amongst themselves for their common rules with respect to their common members. 169 These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO's rules substantively overlap, including such regulatory functions as personnel registration and sales practices. For example, the Commission declared effective a plan to allocate regulatory responsibilities between FINRA and LTSE pursuant to which FINRA assumes examination and enforcement responsibility for broker-dealers that are members of both FINRA and LTSE with respect to the rules of LTSE that are substantially similar to the applicable rules of FINRA, as well as certain specified provisions of the federal securities laws. 170 167 15 U.S.C. 78s(g)(1). 168 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively. 169 See 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Exchange Act allows the Commission to relieve an SRO of certain responsibilities with respect to members of the SRO who are also members of another SRO (“common members”). Specifically, Section 17(d)(1) allows the Commission to relieve an SRO of its responsibilities to: (i) receive regulatory reports from such members; (ii) examine such members for compliance with the Exchange Act and the rules and regulations thereunder, and the rules of the SRO; or (iii) carry out other specified regulatory responsibilities with respect to such members. 170 See Securities Exchange Act Release No. 86587 (Aug. 7, 2019), 84 FR 39883 (Aug. 12, 2019) (File No. 4-747). See also, e.g., Securities Exchange Act Release Nos. 83696 (July 24, 2018), 83 FR 35682 (July 27, 2018) (FINRA/MIAX Exchange/MIAX PEARL); 77321 (Mar. 8, 2016), 81 FR 13434 (Mar. 14, 2016) (File No. 4-697) (FINRA/ISE Mercury, LLC); 73641 (Nov. 19, 2014), 79 FR 70230 (Nov. 25, 2014) (File No. 4-678) (FINRA/MIAX Exchange); 70053 (July 26, 2013), 78 FR 46656 (Aug. 1, 2013) (File No. 4-663) (FINRA/Topaz Exchange n/k/a ISE Gemini, LLC); 59218 (Jan. 8, 2009), 74 FR 2143 (Jan. 14, 2009) (File No. 4-575) (FINRA/Boston Stock Exchange, Inc. (“BSE”)); 58818 (Oct. 20, 2008), 73 FR 63752 (Oct. 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-536) (National Association of Securities Dealers, Inc. (“NASD”) n/k/a FINRA) and Chicago Board of Options Exchange, Inc. concerning the CBOE Stock Exchange, LLC); 55367 (Feb. 27, 2007), 72 FR 9983 (Mar. 6, 2007) (File No. 4-529) (NASD/International Securities Exchange, LLC); 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File No. 4-517) (NASD/Nasdaq). A Rule 17d-2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO. 171 24X has represented to the Commission that it will join all applicable plans, including Rule 17d-2 plans for the allocation of regulatory responsibilities. 172 Similar to other exchanges, the Commission understands from 24X that it will enter into a bilateral Rule 17d-2 agreement covering common members of 24X and FINRA. This agreement will allocate to FINRA regulatory responsibility, with respect to common members, for specified regulatory and enforcement matters arising out of specified common rules and specified provisions of the Exchange Act and the rules and regulations thereunder. In addition, the Commission is conditioning operation of 24X as an exchange on 24X first joining the applicable multilateral Rule 17d-2 plans, including the multi-party Rule 17d-2 plan for the allocation of regulatory responsibilities with respect to certain Regulation NMS and Consolidated Audit Trail Rules and the multi-party Rule 17d-2 plan for the surveillance, investigation, and enforcement of common insider trading rules. 173 171 See supra notes 169-170 and accompanying text. 172 See Form 1, Exhibit E. 173 See Securities Exchange Act Release Nos. 88366 (Mar. 12, 2020), 85 FR 15238 (Mar. 17, 2020) (File No. 4-618) (order approving and declaring effective a proposed amendment to the multi-party Rule 17d-2 plan relating to covered Regulation NMS and Consolidated Audit Trail Rules); 86542 (Aug. 1, 2019), 84 FR 38679 (Aug. 7, 2019) (File No. 4-566) (notice of filing and order approving and declaring effective an amendment to the multi-party Rule 17d-2 plan relating to the surveillance, investigation, and enforcement of insider trading rules). Because 24X anticipates entering into these Rule 17d-2 agreements, it has not made provision to fulfill the regulatory obligations that will be undertaken by FINRA and other SROs under these agreements with respect to common members. 174 Accordingly, the Commission is conditioning the operation of 24X on approval by the Commission of a Rule 17d-2 agreement that allocates the above specified matters to FINRA, and the approval of an amendment to the existing multi-party Rule 17d-2 plans specified above to add 24X as a party. 174 For common members, the regulatory obligations will be covered by the Rule 17d-2 agreements, and for 24X Exchange Members that are not also members of FINRA, the regulatory obligations will be covered by the RSA. D. 24X Trading System 1. Overview of Trading System 175 175 A more detailed description of the manner of operation of 24X's trading system can be found in Form 1, Exhibit E. The proposed rulebook for 24X can be found in Exhibit B to 24X's Form 1, and the governing documents for 24X, 24X US and 24X Bermuda can be found in Form 1, Exhibit A and Exhibit C. A complete set of forms concerning membership and access can be found in Form 1, Exhibit F. 24X proposes to operate a fully automated electronic trading platform 176 for the trading of listed NMS stocks 177 pursuant to unlisted trading privileges (“UTP”) 178 23 hours per day, 179 five (5) days per week, subject to certain trading pauses, as provided in the 24X rules. 180 Similar to other U.S. national securities exchanges, 24X will operate three different trading sessions that span from 4 a.m. to 7 p.m. on each U.S. Business Day: 181 (1) a “Core Market Session” between 9:30 a.m. and 4 p.m., 182 (2) a “Pre-Market Session” between 4 a.m. and 9:30 a.m., 183 and (3) a “Post-Market Session” between 4 p.m. and 7 p.m. 184 24X also will operate a fourth trading session, the 24X Market Session, 185 which, as discussed in greater detail below, 186 will operate between 8 p.m. and 4 a.m. Sunday, Monday, Tuesday, Wednesday, and Thursday nights that precede a U.S. Business Day. 187 176 See Form 1, Exhibit E. See also 24X Rule 11.9(b). 177 See 17 CFR 242.600(b)(55) (defining “NMS Stock”). 178 See 24X Rule 14.1. 179 As discussed below, 24X will pause trading from 7 p.m. until 8 p.m. Monday, Tuesday, Wednesday, and Thursday nights. See 24X Rule 11.15(c)(2). Unless otherwise noted, all times referred to in this order are Eastern Time (“ET”). 180 See, e.g., 24X Rule 11.15(c); Form 1, Exhibit E-1 at 4. See also infra notes 329-338 (discussing 24X's trading pauses). 181 See 24X Rule 1.5(ll) defining “U.S. Business Day.” In addition, 24X proposes, among others, the following terms: “24X Trading Day” ( see 24X Rule (1.5(b)); “Exchange Trading Hours other than the 24X Market Session” ( see 24X Rule 1.5(r)); “Extended Hours Trading” ( see 24X Rule 1.5(s)); “Regular Trading Hours” ( see 24X Rule 1.5(dd)). 24X Rule 1.5(s) defines “Extended Hours Trading” as “trading during the Pre-Market Session, Post-Market Session and 24X Market Session.” 182 See 24X Rule 1.5(l) defining the “Core Market Session.” 183 See 24X Rule 1.5(z) defining the “Pre-Market Session.” See, e.g., NYSE Arca, Inc., Cboe EDGX Exchange, Inc., The Nasdaq Stock Market LLC. 184 See 24X Rule 1.5(y) defining the “Post-Market Session.” See, also e.g., NYSE Arca, Inc., NYSE American LLC, NYSE Chicago, Inc., NYSE National, Inc., Cboe BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., The Nasdaq Stock Market LLC. These national securities exchanges operate post-market sessions until 8 p.m. As discussed above, 24X will end its Post-Market Session at 7 p.m. 185 See 24X Rule 1.5(c) defining the “24X Market Session.” 186 See infra section III.D.2. 187 See 24X Rule 1.5(c). 24X initially proposed to operate the 24X Market Session on weekends and holidays as well as overnight. In Amendment No, 2, 24X revised the 24X Rule 1.5(c) definition of 24X Market Session to include only overnight hours, as discussed above, and to remove its proposal to provide trading on weekends and holidays. 24X will not maintain a physical trading floor. 188 One commenter stated that the Form 1 was unclear about 24X's physical locations. 189 24X responded that it “clearly” provided information on the Form 1 execution page as well as Exhibit E. 190 Specifically, 24X stated that its primary address is in Connecticut and that the Exchange will operate out of a third-party data center in New Jersey, with a secondary site located in Illinois. 191 Further, 24X stated that 24X personnel will operate out of its New York office as well as its Connecticut office. 192 188 See Form 1, Exhibit E-1 at 2. 189 See Healthy Markets Letter at 6. 190 See 24X Letter II at 17. 191 Id. See also Form 1, Execution Page (listing Stamford, Connecticut as its primary address); Form 1, Exhibit E (describing the locations of its Systems and personnel); Form 1, Exhibit E-1 (describing the locations of the trading Systems). 192 See 24X Letter II at 17; see also Form 1, Exhibit E. The Form 1 and exhibits provide information about the location of 24X Systems and personnel. The Form 1 Execution Page states that 24X's primary address is in Stamford, Connecticut. Exhibit E states that 24X will operate out of data centers in New Jersey and Illinois and that its personnel will operate out of offices in Connecticut and New York. Exhibit E-1 states that 24X's trading platform will be located in the Equinix data center in New Jersey (NY4) and that its secondary back-up data center will be located in Chicago, Illinois (CH4). 193 24X has provided information about the location of its platform and its personnel. 193 See also Form 1, Exhibit E. Only broker-dealer members of 24X and entities that enter into market access arrangements with members (collectively “Users” 194 ) will have access to the 24X System, 195 and only Authorized Traders 196 may obtain access to the 24X System on behalf of Users. 197 Liquidity will be derived from quotes and orders to buy and sell submitted to 24X electronically by Exchange Members. 198 24X proposes to operate a fully automated electronic limit order book with a continuous matching function 199 and orders resting on the book would be ranked and executed in price/time priority. 200 194 See 24X Rule 1.5(mm) defining “User.” 195 To obtain authorized access to the 24X System, each User must enter into a User Agreement with 24X. See 24X Rule 11.3(a). See also 24X Rule 1.5(hh) defining “System.” 196 See 24X Rule 1.5(g). 197 See 24X Rule 11.4. 198 24X proposes to have one class of membership open to registered broker-dealers. See 24X Rule 2.3 (stating, in part, that “any registered broker or dealer that is and remains a member of a national securities association registered under Section 15A(a) of the Exchange Act or a member of another national securities exchange registered under Section 6(a) of the Exchange Act or any person associated with such a registered broker or dealer shall be eligible to be, and to remain, a Member”). 199 See Form 1, Exhibit E-1 at 2. 200 See 24X Rule 11.8(a) and 24X Rule 11.9(a)(4). 24X proposes certain rules to govern trading during Exchange Trading Hours other than the 24X Market Session, 201 while other rules and requirements would apply exclusively to trading during the 24X Market Session. 202 For example, 24X proposes to accept Market Orders, 203 Limit Orders 204 and Pegged Orders 205 with various modifiers and time-in-force instructions, although subject to certain limitations 206 during various trading sessions. 207 Specifically, Market Orders would be accepted only during the Core Market Session; Pegged Orders would be accepted only during the Pre-Market Session, the Core Market Session, and the Post-Market Session; and Limit Orders would be accepted during all sessions. 208 Further, pursuant to 24X Rule 11.16, Market Orders and Pegged Orders are not eligible for execution during the 24X Market Session. Orders may be submitted in round lots, odd lots, or mixed lots. 209 24X will permit orders to be entered, canceled, modified, executed on or routed away from 24X during the Pre-Market Session, the Core Market Session, and the Post-Market Session. 210 24X would also permit orders to be entered, canceled, modified or executed on the Exchange during the 24X Market Session. 211 201 See 24X Rule 11.1(a). 202 See 24X Rule 11.16(a) (stating, “[e]xcept as explicitly set forth herein, each of the rules and requirements set forth in this Chapter 11 applies to trading activity during the 24X Market Session.”). The 24X rules make specific provisions for the 24X Market Session with respect to, for example, matters such as order types permitted. See, e.g., Exhibit E-1 to 24X's Form 1; 24X Rule 11.7. 203 24X defines the term “Market Order,” in part, as “[a]n order to buy or sell a stated amount of a security that is to be executed at the NBBO or better when the order reaches the Exchange.” See 24X Rule 11.7(a). 204 24X defines the term “Limit Order” as “[a]n order to buy or sell a stated amount of a security at a specified price or better. A marketable Limit Order is a Limit Order to buy (sell) at or above (below) the lowest (highest) Protected Offer (Protected Bid) for the security.” See 24X Rule 11.7(b). 205 24X defines the term “Pegged Order,” in part, as “[a] User may indicate to peg an order to a reference price, including an instruction of Primary Peg (the NBB for buy orders and NBO for sell orders, with or without offsets) or an instruction of Midpoint Peg (the midpoint of the NBBO). The System's calculation of the NBBO would not take into account any Pegged Orders that are resting on the 24X Book. A new timestamp is created for a Pegged Order each time it is automatically re-priced.” See 24X Rule 11.7(c). 206 See 24X Rule 11.7 (describing, among other things, order types eligible for the various 24X trading sessions). See also Form 1, Exhibit E-1 at 7. 207 See, e.g., 24X Rule 11.7; Form 1, Exhibit B. 208 See 24X Rule 11.7(a)(4) for Market Orders, 24X Rule 11.7(c)(4) for Pegged Orders, and 24X Rule 11.7(b) for Limit Orders. 209 See 24X Rule 11.6(q). See also Form 1, Exhibit E-1 at 5. 210 See 24X Rule 11.1(b). 211 See 24X Rule 11.1(c) (providing, in part, that “to the extent that other Trading Centers are open during the 24X Market Session, orders may be routed away to such Trading Centers during the 24X Market Session”). With respect to the price of executions that would occur on the Exchange, 212 the 24X rules are designed to comply with short sale price test restriction under Rule 201 of Regulation SHO, 213 the order protection requirements of Rule 611 of Regulation NMS, 214 and the National Market System Plan to Address Extraordinary Market Volatility pursuant to Rule 608 of Regulation NMS (“LULD Plan”). 215 24X will permit the use of self-trade protection (“STP”) modifiers to prevent an incoming order from executing against a resting order originating from the same market participant. 216 212 As discussed above, certain rules govern trading during Exchange Trading Hours other than the 24X Market Session, while other rules and requirements apply exclusively to trading during the 24X Market Session. See supra note 201 and accompanying text. See also 24X Rule 11.1(a). 213 See 24X Rule 11.9(a)(1). See also 24X Rule 11.9(a)(5), 24X Rule 11.23, and 24X Rule 13.2. See also supra section III.D.2.f. 214 See 24X Rule 11.9(a)(2). 215 See 24X Rule 11.9(a)(3). See also section III.D.2.b. 216 See 24X Rule 11.9(d). In addition, 24X will permit firms to register as Market Makers with affirmative and negative market making obligations. 217 In particular, Market Makers will be required to maintain continuous two-sided quotes of at least 100 shares only during Regular Trading Hours. 218 While Market Makers would have no such obligations during the Pre-Market, Post-Market or 24X Market Sessions, 24X's proposed rules relating to Market Makers are similar to the rules of other national securities exchanges, which do not extend Market Maker obligations to extended hours trading sessions. 219 217 See 24X Rules 11.17 through 11.20. 218 See 24X Rule 11.20(a)(1). The term “Regular Trading Hours” is defined as “the time between 9:30 a.m. and 4:00 p.m. Eastern Time each U.S. Business Day.” See 24X Rule 1.5(dd). 219 See, e.g., MEMX Exchange Rules 11.17 through 11.20; Cboe EDGX Rules 11.17 through 11.20. In its Form 1, 24X stated that it will join and participate in any applicable national market system plan that other national securities exchanges and/or market centers have joined, including, for example, the three Equity Data Plans 220 that currently govern the collection, consolidation, processing, and dissemination of core data. 221 24X further states that it would “likewise join all other applicable Plans as deemed necessary and in the interest of its Users.” 222 220 The three equity data plans that currently govern the collection, consolidation, processing, and dissemination of national market system data by the exclusive Securities Information Processors (“SIPs”) are (1) the Consolidated Tape Association Plan (“CTA Plan”), (2) the Consolidated Quotation Plan (“CQ Plan”), and (3) the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis (“UTP Plan”) (collectively, the “Equity Data Plans”). See also 24X Rule 1.5(o). 221 See Form 1, Exhibit E. See also 24X Rule 11.11 (providing, in part, that 24X will report executions to the appropriate consolidated transaction reporting system “to the extent required by the Exchange Act and the rules and regulations thereunder.”). See also infra section III.D.2.a.i. (discussing the availability of the Equity Data Plans during the 24X Market Session). 222 See Form 1, Exhibit E (stating, “including, but not limited to, the NMS Plan to Address Extraordinary Market Volatility (“Limit Up-Limit Down Plan”), the NMS Plan Governing the Consolidated Audit Trail (the `CAT NMS Plan'), the NMS Plan for the Selection and Reservation of Securities Symbols, and the 17d-2 Plans for Allocation of Regulatory Responsibilities”). One commenter stated that the Exchange proposal was “somewhat vague” with regard to transaction fees and that 24X “should give a range of where fees will land compared to other exchanges.” 223 24X responded that its approach to fees is “typical for exchange applications” and that Exhibit E states that it “intends to establish a Fee Schedule setting forth all applicable transaction and other fees . . . close to launch of the Exchange” so that the fees reflect the “competitive landscape at that time.” 224 223 See Montone Letter at 9. 224 See 24X Letter II at 15. Form 1 requires an applicant to provide a description of proposed fees. 225 In its Exhibit E, 24X described its proposed fees, including transaction fees, membership fees, regulatory charges, permit application fees, market data fees, co-location fees, connectivity fees, and bandwidth fees. 226 Further, 24X Rule 15.1, which establishes the Exchange's authority to impose fees, dues, assessments and other charges that 24X may prescribe, lists the following fees that 24X will impose: “membership dues, transaction fees, communication and technology fees, regulatory charges, listing fees, and other fees and charges as the Exchange may determine.” 227 24X also stated that it intends to establish a fee schedule that sets forth all fees, and that the actual fee amounts and types will be determined at a time closer to launch. 228 225 See Form 1, Exhibit E (requiring a description of the manner of operation of the System and that the description should include proposed fees). 226 See Form 1, Exhibit E. 227 See 24X Rule 11.15(a). 228 See Form 1, Exhibit E. 24X's Form 1 satisfies the requirements of the Form 1 as it describes the fees that 24X may prescribe. However, any fees, dues or other charges that 24X intends to assess must be filed as a proposed rule change pursuant to section 19(b) of the Exchange Act 229 and Rule 19b-4 thereunder. 230 Exchange fees are subject to the requirements of the Exchange Act, including sections 6(b)(4) and 6(b)(5). 231 229 15 U.S.C. 78s(b). 230 17 CFR 240.19b-4. 231 15 U.S.C. 78f(b)(4), (b)(5). 2. 24X Market Session As discussed above, 24X will operate the 24X Market Session, a fourth trading session that will extend the hours of exchange trading for NMS stocks beyond the existing extended hours sessions. 232 In Amendment No. 2, 24X modified its original proposal for the 24X Market Session to include overnight trading only on certain nights of the week—Sunday through Thursday—that precede a U.S. Business Day. 233 As discussed above, 234 while several exchanges offer a pre-market trading session that may start as early as 4 a.m. on each U.S. Business Day, and most exchanges offer a post-close trading session that ends at 8 p.m. on each U.S. Business Day, 24X's model, as amended, will expand exchange trading hours such that trading on 24X will be conducted on a largely continuous basis during the week subject to a daily one hour trading pause. 235 24X will operate the 24X Market Session, as amended, in a manner that is consistent with current extended hours sessions. 236 Further, as discussed below, 24X will require that 24X Members make disclosures to their customers concerning risks associated with trading during Extended Hours Trading, and has included tailored disclosures that 24X Members must provide to their customers to reflect the potential risks associated with the 24X Market Session, as amended. 237 232 See 24X Rule 11.2(a); see also section III.D.2.d. (discussing securities eligible for trading during the 24X Market Session). See also supra notes 183 and 184 (describing the existing exchanges' extended hours sessions). 233 See 24X Rule 1.5(c). 234 See supra notes 183 and 184 and accompanying text. 235 See 24X Rule 11.15(c). See also infra section III.D.2.c. 236 For example, 24X will not accept Market Orders or Pegged Orders in the 24X Market Session and 24X will utilize the same clearly erroneous execution rules that apply on other venues that have extended hours sessions. 237 See 24X Rule 3.21. See also infra section III.D.2.e. The Commission received several comment letters about the proposed operation of the 24X Market Session, which, as initially proposed, would have operated 8 p.m. until 4 a.m. during every U.S. Business Day as well as most of the day on weekends and holidays, subject to proposed trading pauses. Some commenters supported the originally proposed expansion of trading hours. 238 For instance, two commenters stated that the originally proposed 24X Market Session would bring the “current practice of trading 24/7 onto a lit exchange” 239 and that the market should be left to decide whether this is a valuable endeavor. 240 One commenter stated that 24-hour trading already occurs and that “it is better that it be on a national securities exchange with higher regulatory protections afforded by an exchange.” 241 238 See, e.g., Polygon Letter; DriveWealth Letter; Angel Letter I; Angel Letter II; Montone Letter. 239 See Polygon Letter at 5. See also DriveWealth Letter at 1. 240 See Polygon Letter at 5. See also Angel Letter I. 241 See Angel Letter I at 2. One commenter stated that its recent research “implies that 23/7 trading will likely improve the market's allocative efficiency relative to the traditional 6.5/5 trading schedule.” 242 This commenter stated that their research studied welfare, measured by the allocative efficiency of the market, in equilibria of two market designs: one with a daily closure, and another in which closure is eliminated. According to the commenter, the research showed that “as long as there is a closure for some time, most of the benefits of a market closure are accrued.” 243 Thus, the commenter stated that it is likely that 24X's proposed 23/7 exchange will maintain the welfare benefits of a market closure, reduce the costs of a prolonged closure, and enhance allocative efficiency. 244 242 See Blonien and Ober Letter at 1. 243 According to the commenter, in the model, a market closure not only concentrates liquidity throughout the day but also helps coordinate liquidity, especially towards the end of the trading. Moreover, the commenters state that the cost of a closure, that a traders' positions may deviate far from their desired positions, is, according to the commenter, outweighed by its benefits. See Blonien and Ober Letter at 1. 244 See Blonien and Ober Letter at 1. The commenter stated that these findings are based on a model of large and homogeneous traders, and that heterogeneous groups of traders, such as retail investors, market makers, and informed traders, may have asymmetric responses to market closures of differing lengths. See id. Several commenters raised concerns about the original proposed expansion of trading hours. For instance, two commenters stated that the proposal would harm retail investors due to low volumes and wide spreads during the extended trading hours and a lack of liquidity would result in a wealth transfer from investors to professionals. 245 Another commenter stated that although 24X suggests that retail investors would welcome 24-hour exchange trading, the demand for investors for overnight and weekend trading seems speculative because no information has been provided about the number of such investors or the relevance of the potential benefit. 246 Another commenter stated that investor demand should be considered to assess whether the expansion of trading hours would justify the market-wide costs. 247 245 See Better Markets Letter at 2; SIFMA Letter II at 2. 246 See IEX Letter at 2. 247 See SIFMA Letter II at 2. See infra notes 290-292 and accompanying text (discussing costs relating to the expansion of trading hours). One commenter suggested a “cautious approach to expanding hours” because its research indicated “negative consequences for retail investment.” 248 Another commenter, however, stated that the research cited did not examine overnight trading or expansion of trading hours but instead examined time zone differences. 249 This commenter stated 24-hour trading “is already here on automated trading systems, so rejecting the 24X application would not restrict retail access to overnight trading at all.” 250 248 See Glover and deHaan Letter at 1. 249 See Angel Letter II at 3. 250 See Angel Letter II at 2. With respect to the commenter's concern about retail investor participation in the 24X Market Session, 251 24X stated that, as discussed below, the Commission has historically allowed retail participation in expanded trading hours with appropriate disclosures. 252 In Amendment No. 1, 24X amended its 24X Rule 3.21 to provide additional disclosures designed to address the potential risks of the 24X Market Session. 253 24X stated, in response to commenters questioning whether additional trading hours would benefit investors, that “there is substantial interest in expanded trading hours” and that the markets should be able to determine whether the 24X proposal will be successful. 254 24X also stated that its amended rules for the 24X Market Session are a more incremental approach that will address the cost concerns raised by some commenters because it eliminates the potential costs related to weekend and holiday trading. 255 24X further stated that it did not believe that “costs related to innovation should be the basis for the Commission to determine that an exchange application does not comply with the Exchange Act.” 256 24X also stated that the markets will determine whether “its innovative proposal” is successful. 257 251 See supra note 245 and accompanying text. 252 See 24X Letter II at 11. See also infra section III.D.2.e. (discussing customer disclosures relating to risks of the 24X Market Session). 253 As discussed above, in Amendment No. 2, 24X scaled back the hours of operation of the 24X Market Session to 8 p.m. to 4 a.m. Sunday, Monday, Tuesday, Wednesday, and Thursday nights, so long as the next trading day is a U.S. Business Day. See supra note 233 and accompanying text. As part of Amendment No. 2, 24X also revised the disclosures that must be provided by 24X Members to their customers to reflect the revised operating hours of the 24X Market Session. See infra section III.D.2.e. 254 See 24X Letter III at 5. See also 24X Letter IV at 6 (stating that “the number of market participants interested in overnight trading continues to grow.”). 255 See 24X Letter III at 2. 256 See 24X Letter III at 2. 257 See 24X Letter IV at 6. As discussed further below, the Commission finds that the 24X rules for the 24X Market Session, as amended, are consistent with the Exchange Act. Specifically, the 24X Market Session rules are modeled on the rules of national securities exchanges that currently operate trading sessions during extended hours and are designed to address the potential differences in trading compared to Regular Trading Hours. 258 For example, during the 24X Market Session, the only order type that may be submitted is a Limit Order, which requires market participants to set the prices at which they are willing to trade. Accepting only Limit Orders during extended hours sessions can help to address the potential risks that there may be wider spreads, 259 or that prices may be affected by new announcements made by issuers. 260 Other exchanges allow the submission of only limit orders during extended hours sessions. 261 258 See supra notes 183-184 and accompanying text. 259 See 24X Rule 3.21(f). 260 See 24X Rule 3.21(e). 261 See e.g., NYSEArca Rule 7.34-E(d) (stating that only limit orders are eligible to participate in the Early Trading Session and Late Trading Session). In addition, 24X Members are required to provide disclosures to customers that will provide information about potential risks of trading in extended hours, including the 24X Market Session. These disclosures are consistent with the rules of other SROs, which require customers to be provided with disclosures regarding the potential risks of extended hours trading. 262 While two commenters stated that investors would be harmed by low liquidity, low volumes and wider spreads, these potential risks are included in the disclosures that must be provided to customers by 24X Members. 263 Investors are provided information about these potential risks and are able to decide whether to participate in extended hours sessions, including the 24X Market Session. 262 See e.g., NYSEArca Rule 7.34-E(d)(3); Nasdaq Rule Equity 2, Section 20; MEMX Exchange Rule 3.21; FINRA Rule 2265. 263 See 24X Rule 3.21(a) (describing the risk of lower liquidity); 24X Rule 3.21(f) (describing the risk of wider spreads). Further, the 24X Market Session will overlap with the extended hours trading that currently occurs in the over-the-counter (“OTC”) market. 264 Accordingly, while the 24X Market Session represents a new trading session for exchange trading, market participants, including retail investors, are already able to trade during the times covered by the 24X Market Session. While commenters stated that investor demand should be considered to assess whether the expansion of trading hours would justify market-wide costs, the Commission is required to consider a Form 1 application for consistency with statutory standards. 265 For the reasons discussed herein, the Commission has determined that the 24X Form 1 is consistent with the Exchange Act and the rules thereunder. 264 See e.g., Blue Ocean ATS, LLC (“BOATS”). The operating hours for BOATS occur from 8 p.m. to 4 a.m. on days with the NYSE Trade Reporting Facility is open for trade reporting. See Form ATS-N, available at sec.gov/Archives/edgar/data/1795131/000153949723000091/xslATS-N_X01/primary_doc.xml. 265 In a letter to the Commission, 24X stated that investor demand for overnight trading is growing and provided details of other market participants that have recently expressed interest in expanding the hours of trading on an exchange. See 24X Letter IV at 6 (citing a proposal by NYSE Arca to expand its trading hours and a notice by Schwab announcing an expansion to 24-hour trading for certain stocks). Finally, pursuant to this Form 1, as amended, 24X will not commence operation of the 24X Market Session prior to filing a proposed rule change. Specifically, 24X Rule 1.5(c) requires 24X, prior to commencing operations during the 24X Market Session, to file a proposed rule change, pursuant to section 19(b) of the Exchange Act and the rules thereunder, to amend its rules confirming that 24X is able to comply with its obligations under the Exchange Act during the 24X Market Session and that the Equity Data Plans are prepared to collect, consolidate, process and disseminate quotation and transaction information at all times during the 24X Market Session (“24X Market Session Proposed Rule Change”). As discussed below, the 24X Market Session Proposed Rule Change must be filed with the Commission and approved, or otherwise become effective pursuant to Exchange Act section 19(b), before 24X can provide trading during the 24X Market Session. 266 In the 24X Market Session Proposed Rule Change, 24X must confirm that it is able to comply with its obligations under the Exchange Act during the 24X Market Session and that the Equity Data Plans are prepared to collect, consolidate, process and disseminate quotation and transaction information at all times during the 24X Market Session that is equivalent to the mechanism established for Exchange Trading Hours other than the 24X Market Session. 267 The 24X rule requiring the operation of the Equity Data Plans during the 24X Market Session is designed to ensure that consolidated quotation and transaction data are provided in a manner that is consistent with the existing extended hours sessions on exchanges. 268 Accordingly, 24X rules are designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to and facilitating transactions in NMS stocks, and perfect the mechanism of a free and open market and a national market system. 269 24X rules are also designed to protect investors and the public interest. 270 The 24X rules governing the 24X Market Session will expand the hours of trading available on a national securities exchange, and such trading will be transparent because trading will not occur unless the Equity Data Plans are able to collect, consolidate, process and disseminate consolidated quotation and transaction data during the 24X Market Session ( i.e., between 8 p.m. and 4 a.m. Sunday, Monday, Tuesday, Wednesday, and Thursday nights that precede a U.S. Business Day). 271 The 24X rules for the 24X Market Session will foster competition by introducing another trading venue during these trading hours. 272 Finally, the 24X rules for the 24X Market Session are designed to provide additional investor protections. 273 266 See 24X Rule 1.5(c) and 24X Rule 11.16. 24X may begin operations of its other trading sessions once the conditions discussed below have been satisfied. 267 See 24X Rule 1.5(c). 268 As discussed above, the 24X will not start operating the 24X Market Session unless the Equity Data Plans have established a mechanism to collect, consolidate, process and disseminate quotation and transaction information at all times during the 24X Market Session that is equivalent to the mechanism established for Exchange Trading Hours other than the 24X Market Session, among other things. See 24X Rule 1.5(c). 269 15 U.S.C 78f(b)(5). 270 Id. 271 See infra section III.D.2.a.i. 272 See e.g., supra note 264. 273 See e.g., supra section III.C; and infra section III.D.e; section III.E.2; section III.F. a. Effect of 24X Market Session on Market Structure Several commenters raised questions about the potential impact of the 24X Market Session, as originally proposed, on current market structure because it would greatly expand exchange trading hours. Several commenters stated that the Commission should consider roundtable discussions about the market structure implications of 24-hour trading. 274 One commenter stated that the 24X proposal “has serious implications for the regulatory, technological, and operational underpinnings of the equity securities markets and will result in significant costs for the industry.” 275 Another commenter stated that the 24X Market Session, as originally proposed, is “incompatible” with current market structure and that a broader Commission engagement, outside of an exchange application, is needed to determine how U.S. equity market structure would be affected. 276 This commenter further stated that the 24X Market Session as originally proposed “could exacerbate a two-tiered system of regulation between core and extended trading hours” because certain Exchange Act rules apply only during Regular Trading Hours 277 and could make compliance with best execution obligations more challenging. 278 Another commenter stated that the 24X Market Session, as originally proposed “[r]aises significant, insufficiently addressed market policy concerns,” 279 while another stated that the proposal represents the “first occurrence of a national securities exchange that utilizes unlisted trading privileges to operate outside the trading hours of the primary listing exchanges.” 280 274 See DriveWealth Letter at 2, SIFMA Letter at 2, SIFMA Letter II at 3-4; FIA PTG Letter at 2; FIA PTG Letter II at 3. 275 See FIA PTG Letter at 1, 2; FIA PTG Letter II at 1. 276 See SIFMA Letter at 4-5 (stating that the Commission must consider a number of factors, including the public interests involved, the effect on exchange competition dynamics, interaction with existing and proposed regulations, and whether a fair and orderly market is possible where potentially different rules would apply to exchanges based on the hours they operate). This commenter also stated that the Commission must consider how the 24X Form 1 would interact with “outstanding equity market structure proposals.” See SIFMA Letter at 6-7. The commenter asked interpretative questions about the proposal to amend Regulation NMS. See Securities Exchange Act Release No. 96494 (Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022). After submission of the comment letter, the Commission adopted amendments to Regulation NMS on Sept. 18, 2024. See Securities Exchange Act Release No. 101070 (Sept. 18, 2024), 89 FR 81620 (Oct. 8, 2024) (“2024 Regulation NMS Adopting Release”). The commenter also asked questions about proposed Regulation Best Execution, Securities Exchange Act Release No. 96496 (Dec. 14, 2022), 88 FR 5540 (Jan. 27, 2023); and the proposed Order Competition Rule, Securities Exchange Act Release No. 96495 (Dec. 14, 2022), 88 FR 128 (Jan. 3, 2023). 24X stated that “addressing how such proposals may relate to 24X's exchange application are outside of the scope of consideration of whether 24X's exchange application complies with the requirements of the Exchange Act.” See 24X Letter II at 19. Proposed Regulation Best Execution and the proposed Order Competition Rule remain proposals. The commenter submitted a second letter requesting confirmation about the application of aspects of the 2024 Regulation NMS Adopting Release during the 24X Market Session. See SIFMA Letter II at 13. The questions posed by the commenter are addressed within the 2024 Regulation NMS Adopting Release and existing rules and regulations. The 2024 Regulation NMS Adopting Release, as well as the definitions included in Rule 600 of Regulation NMS and the specific rules under Regulation NMS, define the application of the rules during different trading sessions. 277 For example, the commenter stated that certain aspects of Regulation NMS only apply during Regular Trading Hours, such as Rule 611 of Regulation NMS, and that certain definitions in Rule 600 of Regulation NMS specify Regular Trading Hours, such as “covered order.” See SIFMA Letter I at 4. 278 Id. 279 See Healthy Markets Letter at 7. 280 See Nasdaq Letter at 3. 24X stated that “in today's market, the regulatory requirements vary depending on the trading session” with greater protections required during Regular Trading Hours. 281 24X stated that the Commission has allowed extended trading hours on other exchanges and the same rationale should be applied in this instance because the 24X rules for the 24X Market Session raise “no new issues.” 282 In response to the comment about trading NMS stocks pursuant to UTP outside of the hours of the primary listing exchanges, 24X stated that it would “coordinate with the primary listing markets with regard to their regulatory roles related to their listed companies ( e.g., trading halts).” 283 Further, 24X stated that 24X Rule 11.15(c)(5) requires 24X to halt trading if the primary listing exchange determines to halt trading. 284 In response to comments about industry roundtables, 24X stated that “its exchange application has been subject to public comment by the industry and others . . . in accordance with the requirements of the Exchange Act.” 285 24X further stated that amending the rules governing the 24X Market Session to eliminate trading on weekends and holidays in response to comments is a “significant adaption.” 286 281 See 24X Letter II at 14. 24X further states that it will comply with all required rules and regulations applicable to national securities exchanges during its Core Market Session. Id. 282 See 24X Letter II at 14. 283 Id. at 8. 284 Id. at 4. 285 See 24X Letter III at 5. 286 Id. The 24X rules for the 24X Market Session have been amended to increase transparency and enhance customer risk disclosures such that it will operate in a manner that is consistent with the regulatory framework of the extended hours sessions of other national securities exchanges. 287 As discussed throughout this order, the 24X Market Session, as amended, will operate with rules that are designed to protect investors consistent with the requirements of the federal securities laws and the rules and regulations thereunder. 287 See also infra section III.D.2.b.i. Several commenters suggested that a broader study of expanded hours trading should be conducted prior to Commission action on the 24X exchange application. 288 The continuing evolution of the equities market, including increasing investor interest in extended hours trading, may warrant consideration of the existing regulatory scheme that applies to expanded hours trading sessions. The Commission continually monitors the national market system and the operation of the Federal securities laws, and the Commission, consistent with its oversight of the national market system, will continue to monitor the developments of extended hours trading. However, the monitoring of new market developments does not foreclose Commission action on the 24X Form 1, which, for [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-28551. Public record. Not legal advice.