The SEC concluded that the bitcoin futures markets are not large enough to permit NYSE Arca and Cboe BZX to list and allow trading in shares of bitcoin exchange-traded products. The exchanges failed to convince the Division of Trading and Markets, acting on delegated authority, that they had entered into surveillance-sharing agreements with a regulated market of significant size related to bitcoin sufficient to prevent fraud and manipulation, as required by the Exchange Act. The SEC has since notified the exchanges that the orders denying the rule change proposals have been stayed pending Commission review (Cboe letter; NYSE Arca Direxion letter and ProShares letter) (Release No. 34-83904 (NYSE Arca); Release No. 34-83912 (NYSE Arca); and Release No. 34-83913 (Cboe BZX Exchange).
Deterring fraud and manipulation. Exchange Act Section 6(b)(5) requires that an exchange’s rules be "designed to prevent fraudulent and manipulative acts and practices." An exchange listing ETPs can meet its obligations under Section 6(b)(5) by relying on a surveillance-sharing agreement with a regulated market of significant size to detect and deter fraud and manipulation. According to the SEC, this type of agreement facilitates the availability of information necessary to investigate a manipulation if it were to occur.
The SEC has interpreted the terms "significant market" and "market of significant size" to include a market where there is a reasonable likelihood that a person attempting to manipulate an ETP would also have to trade on that market to be successful (and a surveillance-sharing agreement would assist the ETP lister in detecting misconduct) and when it is unlikely that trading in the ETP would be the predominant influence on prices in that market.
Insufficient evidence of deterrence. Both exchanges argued that traditional measures to detect and deter manipulation and existing surveillance procedures are sufficient, and Cboe BZX suggested that the price of bitcoin is resistant to manipulation. The SEC found, however, that they failed to establish that other means would prevent fraudulent and manipulative acts or that the underlying market was demonstrably resistant to manipulation, necessitating a surveillance-sharing agreement with at least one significant, regulated market relating to bitcoin.
The exchanges represented that they are able to share surveillance information with bitcoin futures markets regulated by the CFTC through membership in the Intermarket Surveillance Group. The SEC found, however, that the record does not provide a basis for the conclusion that these markets are markets of significant size in bitcoin futures contracts. Further noting that CFTC Chairman J. Christopher Giancarlo has characterized the volume of the bitcoin futures markets as "quite small," the SEC concluded that the exchanges cannot rely on surveillance-sharing agreements.
In disapproving the proposed rule changes, the SEC emphasized that its disapproval does not reflect an evaluation of whether bitcoin "has utility or value as an innovation or an investment."
Companies: NYSE Arca, Inc.; Cboe BZX Exchange, Inc.
MainStory: TopStory Blockchain ExchangesMarketRegulation FraudManipulation SecurityFutures
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