Cboe BYX Exchange Proposes Rule Change to Clarify Pegged Order Functionality and Align with Affiliates

On December 19, 2025, the Securities and Exchange Commission published a notice in the Federal Register regarding a proposed rule change filed by Cboe BYX Exchange, Inc. The filing, effective immediately as a non-controversial amendment under Section 19(b)(3)(A)(iii) of the Securities Exchange Act of 1934, seeks to modify Rule 11.9(c)(8). This rule governs Pegged Orders, which automatically adjust their prices in response to changes in the national best bid or offer. The amendment clarifies the order's operation when the NBBO becomes unavailable and aligns BYX's rule text with that of its affiliate exchanges, Cboe EDGA Exchange, Inc. and Cboe EDGX Exchange, Inc. This development underscores ongoing efforts to harmonize exchange rules, potentially enhancing operational efficiency for market participants without altering core functionalities.

Background on Pegged Orders

Pegged Orders, as defined in current BYX Rule 11.9(c)(8), are limit orders that the exchange's system adjusts automatically based on shifts in the NBBO. These orders can be either Primary Pegged Orders, which track the same-side NBBO with an optional offset, or Market Pegged Orders, which reference the opposite-side NBBO. They are not routable and receive new timestamps upon each adjustment. Under the existing setup, if the relevant NBB or NBO disappears, the order is canceled back to the user. The proposed change shifts this behavior: the order will stay on the BYX Book but become ineligible for execution until the NBBO reappears, at which point it gets a new timestamp and regains executability.

This adjustment draws directly from the rule text of EDGA and EDGX Rule 11.6(j), with modifications only to fit BYX's existing framework. The filing emphasizes that no new functionality is introduced, as the behavior mirrors what is already operational on the affiliate exchanges. BYX operates as a self-regulatory organization under the oversight of the SEC, and this filing reflects its obligation to maintain clear, consistent rules that support fair markets.

Key Players and Regulatory Context

The primary entity involved is Cboe BYX Exchange, Inc., a national securities exchange owned by Cboe Global Markets. Its affiliates, EDGA and EDGX, have similar rule structures, and the proposal aims for alignment to simplify compliance for users who operate across these platforms. The SEC, as the regulatory body, reviews such filings to ensure compliance with the Securities Exchange Act of 1934, particularly Section 6(b)(5), which requires exchange rules to promote just and equitable principles of trade and protect investors.

The filing cites Section 19(b)(1) of the Act and Rule 19b-4, classifying the change as non-controversial and thus immediately effective. This streamlined process is reserved for amendments that do not significantly affect investor protection or impose burdens on competition. No specific legal precedents are referenced in the filing, but the approach aligns with broader SEC approvals of similar rule harmonizations among affiliated exchanges. For instance, past Cboe family filings have emphasized consistency to reduce confusion for market participants, a principle echoed here.

Political forces appear minimal, as this is a technical adjustment rather than a policy-driven reform. However, it occurs amid ongoing discussions about market structure efficiency, including NBBO reliability and order handling during periods of market stress. Stakeholders such as broker-dealers and institutional investors may view this as a step toward more resilient order types, while regulators focus on maintaining transparency.

Implications for Market Operations

In the short term, the rule change could reduce disruptions for users of Pegged Orders. Currently, cancellations during NBBO unavailability force users to re-enter orders, potentially leading to lost priority or execution opportunities. By retaining orders on the book, the amendment minimizes such friction, allowing seamless resumption when quotes return. This is particularly relevant in volatile markets where NBBO gaps might occur due to rapid price movements or technical issues.

Long-term implications include enhanced rule consistency across Cboe exchanges, which may encourage greater participation from users who value uniformity. The filing states that the change supports Section 11A(a)(1) of the Act by fostering fair competition among brokers and exchanges. However, it does not address broader concerns like NBBO accuracy or the impact of high-frequency trading on pegged mechanisms. Perspectives differ: proponents, including exchange operators, argue it perfects the national market system by clarifying operations. Critics, potentially from competing exchanges or advocacy groups, might question whether retaining non-executable orders adds unnecessary complexity to the order book without sufficient benefits. The filing asserts no unfair discrimination, as the behavior applies equally to all users.

Evidence from the filing includes specific rule text comparisons, noting that BYX's amendment is 'based on EDGA/EDGX Rule 11.6(j) and is different only to the extent necessary to conform to the Exchange's current rules.' It also highlights that the proposal 'does not propose to implement new or unique functionality that has not been previously filed with the Commission or is not available on EDGA or EDGX.' This underscores a factual, incremental approach.

Potential Challenges and Debates

Ongoing debates may center on whether such alignments adequately address evolving market dynamics, such as increased automation or regulatory scrutiny of order types. Users might debate the timestamp refresh's impact on priority queues, though the filing maintains it aligns with existing practices. No comments were received on this filing, per the document, but future SEC solicitations could reveal diverse views.

In summary, this rule change refines Pegged Order handling to promote clarity and consistency, reflecting a commitment to efficient markets. Potential next steps include monitoring for implementation issues or further harmonizations across exchanges. Challenges could arise if market events test the new behavior, prompting additional refinements, while debates continue on balancing innovation with regulatory simplicity.