The New York Stock Exchange filed a proposed rule change with the Securities and Exchange Commission on February 12, 2026, seeking to amend Rule 7.35B(g)(2). This amendment would permit Designated Market Makers to price closing auctions for listed exchange-traded products outside the standard parameters, using a proprietary calculation of the ETP's end-of-day net asset value. Published in the Federal Register on March 2, 2026, the filing became effective immediately under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. The move addresses challenges in aligning ETP closing prices with their underlying values, especially for products with lower liquidity. It introduces a narrow exception to promote pricing accuracy while maintaining market integrity through supervisory requirements and regulatory oversight. This development could enhance the efficiency of closing auctions on the NYSE, a key venue for trading ETPs, by allowing prices to better track net asset value in specific scenarios.
Background on NYSE Closing Auction Rules
Rule 7.35B outlines the responsibilities of Designated Market Makers in facilitating closing auctions on the NYSE. Under the current framework, DMMs must determine the auction price within a defined range: between the last-published Imbalance Reference Price, which is the Exchange Last Sale Price bounded by the best bid and offer, and the last-published non-zero Continuous Book Clearing Price. This price represents the level at which all better-priced orders on the side of the imbalance can be matched. As described in the filing, this structure 'promotes determinism with respect to the Closing Auction because the Closing Auction Price must be within the predetermined range of prices that have been disseminated via the Closing Auction Imbalance Information and that cannot be changed after the end of Core Trading Hours.'
Exchange-traded products differ from traditional operating company securities because their value derives from underlying assets. The end-of-day net asset value is calculated by summing the fund's assets, subtracting liabilities, and dividing by outstanding shares. ETPs also feature creation and redemption mechanisms that help keep market prices close to NAV through arbitrage by market participants, including DMMs. The Commission has previously noted that this arbitrage function 'helps to prevent the market price of ETP Securities from diverging significantly from the value of the ETP's underlying or reference assets,' as cited in Securities Exchange Act Release No. 75165.
However, for ETPs with lower liquidity and trading volumes, the official last sale price on the NYSE may diverge from NAV, particularly when influenced by wider bid-ask spreads or limited displayed liquidity. This can result in an Imbalance Reference Price that does not align with away-market quotes more closely tied to NAV.
Details of the Proposed Rule Change
The NYSE proposes a limited exception for ETPs, allowing DMMs to select a closing auction price outside the standard range if it is based on the DMM unit's proprietary NAV calculation. This would enable pricing that better reflects the ETP's underlying value in cases where the rule-bound range deviates from NAV. For instance, the filing provides an example where an ETP with an NAV of $25.00 has away-market quotes at $24.98 x $25.02, but the NYSE's last sale is $25.25 due to limited liquidity, forcing a closing price between $25.25 and $25.30 despite the mismatch.
To use this exception, DMM units must establish policies and procedures for documenting and supervising the NAV calculation and the decision to apply it. The filing states that 'the Exchange expects that the vast majority of Closing Auctions will continue to be priced at or between the last-published Imbalance Reference Price and Continuous Book Clearing Price, and that this narrow exception for ETPs will be used sparingly and with ample justification by DMM units.'
This proposal draws parallels to existing Rule 104(d)(1)(B), which allows certain aggressing transactions in the final ten minutes of trading to align a security's price with underlying assets, even if it results in a new high or low for the day.
Purpose and Statutory Basis
The purpose of the amendment is to improve the quality of ETP closing auctions by addressing pricing divergences from NAV. The filing argues that it would 'remove impediments to, and perfect the mechanism of, a free and open market and a national market system' under Section 6(b)(5) of the Act, by enabling more accurate pricing, especially for less liquid ETPs. It emphasizes that ETP pricing relies on arbitrage to minimize NAV deviations, and the exception supports this by providing flexibility in rare cases.
On the statutory basis, the NYSE asserts consistency with preventing fraudulent practices and protecting investors. Safeguards include the requirement for DMM policies and procedures, plus the Exchange's regulatory program, which involves surveillances by the Financial Industry Regulatory Authority on its behalf. These measures aim to ensure auditable and supervised use of the exception. The filing notes that the proposal 'would not be inconsistent with the public interest and the protection of investors' due to these protections.
Potential Implications and Perspectives
From a market efficiency standpoint, the change could reduce instances of closing prices that deviate from underlying values, potentially boosting investor confidence in NYSE-listed ETPs. Market participants, including issuers and traders, may view this as a positive step toward aligning exchange rules with the unique characteristics of ETPs, as supported by prior Commission analyses in releases like No. 87056.
Critics might argue that introducing discretion could undermine the determinism of closing auctions, potentially leading to less predictability. However, the filing counters this by limiting the exception to ETPs and requiring justification and supervision. Regulators and investor advocates may emphasize the importance of robust oversight to prevent misuse, given the role of closing prices in benchmarking and settlement.
In the broader context, this aligns with ongoing efforts to refine exchange rules for innovative products like ETPs, building on precedents such as Rule 6c-11 for ETFs. Short-term implications include possible adjustments by DMMs and market participants to new procedures, while long-term effects could involve improved liquidity and pricing accuracy for ETPs.
In summary, the NYSE's proposed amendment introduces targeted flexibility to ETP closing auctions, backed by supervisory requirements. Potential next steps include the solicitation of public comments until March 23, 2026, after which the SEC could approve, disapprove, or suspend the rule. Ongoing debates may center on balancing innovation with market stability, with challenges including ensuring consistent application across DMM units and monitoring for any unintended impacts on trading behavior.
