
[Federal Register: July 30, 2009 (Volume 74, Number 145)]
[Notices]               
[Page 38075-38077]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30jy09-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60371; File No. SR-NASDAQ-2009-070]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend NASDAQ Rule 4751 To Provide System Functionality That Will 
Cancel Any Portion of Most Types of Unpriced Orders

July 23, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 20, 2009, The NASDAQ Stock Market LLC (the ``NASDAQ Exchange'') 
\3\ filed with the Securities and Exchange Commission (``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the NASDAQ Exchange. The NASDAQ Exchange 
has designated the proposed rule change as constituting a non-
controversial rule change under Rule 19b-4(f)(6) under the Act,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that The NASDAQ Stock Market LLC refers 
to itself in a variety of ways throughout this notice.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The NASDAQ Exchange is proposing a rule change with the Securities 
and Exchange Commission [sic] to amend NASDAQ Rule 4751 to provide 
system functionality that will cancel any portion of most types of 
unpriced orders (also known as market orders) submitted to the Exchange 
that would execute at a price that is more than $0.25 or 5 percent 
worse than the national best bid and offer at the time the order 
initially reaches the Exchange, whichever is greater. This would apply 
both to orders executing on NASDAQ and the portion of any order routed 
to another market center.
    (a) The text of the proposed rule change is below. Proposed new 
language is underlined; deletions are bracketed.[sic] \5\
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    \5\ Changes are marked to the rules of The NASDAQ Stock Market 
LLC found at http://nasdaqomx.cchwallstreet.com/.
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* * * * *

Rule 4751. Definitions

    (a)-(e) No change.
    (f)(1)-(11) No change.
    (12) ``Unpriced Orders'' are any order types permitted by the 
System to buy or sell shares of a security at the national best bid 
(best offer) (``NBBO'') at the time when the order reaches the System.
    (13) ``Collared Orders'' are all Unpriced Orders except: (1) Market 
On Open Orders as defined in Rule 4752; (2) Market On Close Orders as 
defined in Rule 4754; (3) Unpriced Orders included by the System in any 
Nasdaq Halt Cross or Nasdaq Imbalance Cross, each as defined in Rule 
4753; or (4) Unpriced Orders that are Reference Price Cross Orders as 
defined in Rule 4770. Any portion of a Collared Order that would 
execute (either on NASDAQ or when routed to another market center) at a 
price more than $0.25 or 5 percent worse than the NBBO at the time when 
the order reaches the System, whichever is greater, will be cancelled.
    (g)-(i) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASDAQ Exchange included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The NASDAQ Exchange has prepared summaries, 
set forth in Sections A, B, and C below, of the most significant 
aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to protect market 
participants by reducing the risk that unpriced orders, also known as 
market orders, will execute at prices that are significantly worse than 
the national best bid and offer (``NBBO'') at the time the Exchange 
receives the order. NASDAQ believes that most market participants 
expect that their order will be executed at its full size at a price 
reasonably related to the prevailing market. However, participants may 
not be aware that there is insufficient liquidity at or near the NBBO 
to fill the entire order, particularly for more thinly-traded 
securities. These unpriced orders can disrupt both on [sic] NASDAQ and 
other markets to which all or a portion of these orders are routed.
    NASDAQ is proposing to implement new functionality in its trading 
and routing systems that would cancel any portion of most unpriced 
orders that would execute either on NASDAQ or when routed to another 
market center at a price that is the greater of $0.25 or 5 percent 
worse than the NBBO at the time NASDAQ receives the order. Unpriced 
orders that would be subject to this calculation and potential 
cancellation are defined as ``Collared Orders.''
    The following example illustrates how the Collared Order process 
would work. A market participant submits a SCAN Order (routable order) 
to buy 500 shares.\6\ A SCAN order executes within NASDAQ to the extent 
liquidity is available at the NBBO and then routes to other market 
centers. The NBBO is $6.00 bid by $6.05 offer, with 100 shares 
available on each side. Both sides of the NBBO are set by another 
market center (``Away Market''), but NASDAQ has 100 shares available at 
the $6.05 to sell at the offer price and also has reserve orders to 
sell 100 shares at $6.32 and 400 shares at $6.40. No other market 
center is publishing offers to sell the security in between $6.05 and 
$6.40.
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    \6\ If the order were a NASDAQ-only unpriced order that is not 
eligible for routing, NASDAQ would execute against the liquidity 
available on NASDAQ up to the Collared Order thresholds and cancel 
the remainder of the order, provided, however, that a NASDAQ-only 
order will never trade through a protected quote on another market 
center.
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    In this example, the Collared Order would be executed in the 
following manner:

[[Page 38076]]

     100 shares would be executed by NASDAQ at the $6.05;
     400 shares would be routed to the Away Market as an 
immediate or cancel order with a price of $6.05;
     100 shares executed by the Away Market; \7\
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    \7\ This assumes that the Away Market's offer was still 
available and that the Away Market had no additional non-displayed 
orders at this price.
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     300 shares returned to NASDAQ;
     100 shares executed by NASDAQ at $6.32 (more than $0.25 
but less than 5 percent worse than the NBBO); and
     200 shares, representing the remainder of the Collared 
Order, would be cancelled because the remaining liquidity available at 
$6.40 is more than 5 percent worse than the NBBO.
    The following unpriced orders would be excluded from the definition 
of Collared Orders:
     Market On Open Orders that are included in the NASDAQ 
Opening Cross;
     Market On Close Orders that are included in the NASDAQ 
Closing Cross;
     Unpriced orders that are included in NASDAQ Halt and 
Imbalance Crosses; \8\
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    \8\ The Halt Cross is used to resume trading in stocks that have 
been halted, such as in cases of regulatory halts, and for the 
release of initial public offerings for trading.
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     Unpriced orders that meet the definition of Reference 
Price Cross Orders for purposes of the NASDAQ Crossing Network.\9\
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    \9\ The Crossing Network occurs at four scheduled times during 
the trading day for orders designated for the network.
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    NASDAQ proposes to exclude these unpriced orders because in each 
case the crossing mechanism is designed to lessen or eliminate the 
impact that an individual unpriced order may have on price discovery. 
For example, the Crossing Network is designed to execute as many shares 
as can be paired at the midpoint of the NBBO at the time the cross is 
timed to occur. Therefore, an unpriced order in the Crossing Network, 
which can never itself impact the NBBO, would not affect the price at 
which the trades occur. Any portion of the unpriced order that was not 
executed in the Crossing Network would be cancelled or carried forward 
to the next Crossing Network if so instructed.
    With respect to the Opening Crosses, Closing Crosses and Halt 
Crosses, the crosses are designed to aggregate orders input into the 
cross and to execute the most orders that can be matched at a single 
price. In addition, NASDAQ displays to the market both the size of any 
order imbalances and the likely price at which the cross will execute. 
This transparency incentivizes firms to enter orders on the opposite 
side of a large imbalance, causing the execution price to move closer 
to the prior market price for the security. This process mitigates the 
impact of a large unpriced order. NASDAQ also notes that orders entered 
into crosses are not immediately executed, unlike unpriced orders in 
the continuous market. In many cases this gives a participant time to 
cancel an order before the crossing process begins.
    NASDAQ believes that market participants who wish to trade at 
prices further away from the NBBO than the Collared Order thresholds 
would permit, may still accomplish their strategy by submitting a 
marketable limit order to NASDAQ. In the example above, a market 
participant with such a strategy could have input a limit order with a 
price of $7.00, which would have executed up to its full size, either 
on NASDAQ or on other market centers if the order was routable.
    NASDAQ's proposal is similar to a rule change recently implemented 
by BATS Exchange, Inc.\10\
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    \10\ See Securities Exchange Act Release No. 59258 (Jan. 15, 
2009), 74 FR 4788 (Jan. 27, 2009) (SR-BATS-2009-001) (Amendment to 
BATS Rule 11.9, entitled ``Orders and Modifiers''). NASDAQ's 
proposed thresholds of the greater of $0.25 or 5 percent are tighter 
than the BATS thresholds of the greater of $0.50 or 5 percent. 
NASDAQ believes the tighter thresholds may reduce the impact of 
unpriced orders at lower prices, where $0.50 constitutes a 
comparatively large percentage move.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by avoiding execution of unpriced orders (either on NASDAQ or 
on other market centers as a result of orders routed by NASDAQ) at 
prices that are significantly worse than the NBBO at the time the order 
is initially received by NASDAQ. NASDAQ believes that the NBBO provides 
reasonable guidance of the current value of a given security and 
therefore that market participants should have confidence that their 
unpriced orders will not be executed at a significantly worse price 
than the NBBO. NASDAQ also believes that this proposal is similar to 
thresholds for market orders recently implemented by BATS Exchange, 
Inc.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASDAQ Exchange does not believe that the proposed rule change 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
    NASDAQ has requested that the Commission waive the 30-day operative 
delay set forth in Rule 19b-4(f)(6). The Commission notes (i) the 
proposal is similar to existing thresholds on market orders adopted by 
the BATS Exchange, Inc.; (ii) it presents no novel issues; and (iii) 
the functionality is voluntary, and it may provide a benefit to market 
participants. For these reasons, the Commission believes it is 
consistent with the protection of investors and the public interest to 
waive the 30-day operative delay, and hereby grants such waiver.\15\
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    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 38077]]

including whether the proposed rule change is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2009-070 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2009-070. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASDAQ-2009-070 and should be submitted on or before 
August 20, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-18164 Filed 7-29-09; 8:45 am]

BILLING CODE 8010-01-P
