
[Federal Register Volume 76, Number 92 (Thursday, May 12, 2011)]
[Notices]
[Pages 27699-27701]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11619]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64430; File No. SR-NASDAQ-2011-059]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Establish a Midpoint Peg Post-Only Order

May 6, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on April 28, 2011 The NASDAQ Stock Market LLC (the ``Exchange'' or 
``NASDAQ'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing this proposed rule change to establish the 
Midpoint Peg Post-Only Order as a new order type. NASDAQ proposes to 
implement the rule change on May 9, 2011 or as soon thereafter as 
practicable. The text of the proposed rule change is available at 
http://www.nasdaq.cchwallstreet.com, at NASDAQ's principal office, and 
at the Commission's Public Reference Room.

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 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 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
    In order to provide enhanced functionality, NASDAQ proposes to 
adopt an additional order type known as the Midpoint Peg Post-Only 
Order. Like a regular Midpoint Peg Order, a Midpoint Peg Post-Only 
Order is a non-displayed order that is priced at the midpoint between 
the national best bid and best offer (``NBBO'') (as determined using 
the consolidated tape). However, like a Post-Only Order, the Midpoint 
Peg Post-Only Order does not remove liquidity from the System upon 
entry if it would lock a non-displayed order on the NASDAQ Market 
Center system (the ``System''). Rather, the Midpoint Peg Post-Only 
Order will post and lock the pre-existing order, but will remain 
undisplayed.\3\ For example, if the NBBO is $1.10 bid and $1.11 offer, 
and there is a non-displayed Midpoint Peg Order to buy on the book at 
$1.105, an incoming Midpoint Peg Post-Only Order to sell will also post 
to the book at $1.105 and will not execute. By contrast, a regular 
Midpoint Peg Order would execute against the posted order at $1.105. If 
the Midpoint Peg Post-Only Order would cross a pre-existing order, 
however, the crossing orders will execute.
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    \3\ SEC Rule 610(d) under Regulation NMS, 17 CFR 242.610(d), 
restricts displayed quotations that lock or cross protected 
quotations in NMS Stocks, but does not apply to non-displayed 
trading interest.
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    Midpoint Peg Post-Only Orders that post to the book and lock a pre-
existing non-displayed order will execute against an incoming order 
only if the price of the incoming buy (sell) order is higher (lower) 
than the price of the pre-existing order. This restriction ensures that 
the non-displayed Midpoint Peg Post-Only Order will not execute before 
an order already on the book unless the incoming order against which it 
executes has price priority over the already posted order. For example, 
if the NBBO is $1.10 bid and $1.11 offer, and there is a non-displayed 
Midpoint Peg Order to buy on the book at $1.105, an incoming Midpoint 
Peg Post-Only Order to sell will also post to the book at $1.105 and 
will not execute. If another Midpoint Peg Order to buy is entered, it 
would also post to the book, rather than executing against the Midpoint 
Peg Post-Only Order. On the other hand, an order to buy at $1.11 would 
execute against the Midpoint Peg Post-Only Order, receiving $0.005 
price improvement. Thus, the order provides a means by which a market 
participant may offer price improvement in exchange for receiving 
greater certainty with respect to its trading costs.
    If, on the other hand, a Midpoint Peg Order and a Midpoint Peg 
Post-Only Order are locked, and a Midpoint Peg Order is entered on the 
same side of the market as the Midpoint Peg Post-Only Order, the new 
order will execute against the original Midpoint Peg Order. Thus, in 
the above example, if a Midpoint Peg Order to buy at $1.105 is locked 
by a Midpoint Peg Post-Only Order to sell at $1.105, a subsequent 
Midpoint Peg Order to sell at $1.105 would execute against the original 
buy order. This is the case because the market participant entering the 
Midpoint Peg Post-Only Order has expressed its intention not to execute 
against posted liquidity, and therefore cedes execution priority to the 
new order.
    A Midpoint Peg Post-Only Order will only be posted to the book at a 
price of more than $1. Accordingly, if the midpoint between the NBBO 
for a particular stock is $1 or less, all Midpoint Peg Post-Only Orders 
for that stock will be rejected or cancelled, as applicable. This 
limitation reflects the fact that the difference between the inside 
market and the midpoint for stocks at this price level is likely to be 
extremely small, and therefore the price improvement opportunities 
associated with the order in such stock are unlikely to justify making 
the order available. NASDAQ's opening cross (Rule 4752), halt and 
imbalance cross (Rule 4753), and closing cross (Rule 4754) require 
various ongoing calculations of the best bid and offer within NASDAQ. 
For purposes of these calculations, a Midpoint Peg Post-Only Order to 
buy (sell) that is locking another non-displayed order shall be deemed 
to have a price equal to the price of the highest sell order (lowest 
buy order) that would be eligible to execute against the Midpoint Peg 
Post-Only Order in such circumstances.\4\
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    \4\ In addition to amending Rule 4751 to add a description of 
the Midpoint Peg Post-Only Order's functionality, NASDAQ is also 
amending the list of order types in Rule 4755 to add a reference 
both to the new order type and also the existing Post-Only Order, 
which had been inadvertently omitted from that rule when the Post-
Only Order was introduced.
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    The proposed order is virtually identical to functionality 
previously introduced by the National Stock Exchange (``NSX'').\5\ 
NSX's Zero Display

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Order can be pegged to the midpoint between the national best bid and 
offer (``NBBO'') and can also be designated as a Post Only Order. ``If 
a Zero Display Order is designated as a Post Only Order and is 
immediately marketable, the order will not be executed, but will be 
posted to the NSX Book, unless the contra-side order with which it 
would interact is a Zero Display Order that has not been designated as 
Post Only, in which case the order will be executed.'' \6\ In that 
case, however, the incoming Zero Display Order that has been designated 
as Post Only is deemed to provide liquidity for purposes of NSX's fees 
and rebates, while ``the non-Post Only Zero Display Order will be 
considered liquidity taking by the Exchange, regardless of which order 
arrives at NSX first.'' \7\ Because all orders priced at the midpoint 
between the NBBO must be non-displayed (since they would otherwise 
establish a new NBBO), NSX's Zero Display Order functionality allows 
conditions under which an incoming Post Only Zero Display order, pegged 
to the midpoint and designated as Post Only, locks an identical order 
on the other side of the market and both orders post to the book. As 
NSX noted, however, ``[t]his will not result in a locking or crossing 
quote, because the Zero Display Order will not be displayed and 
therefore will not be a quote.''
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    \5\ See Securities Exchange Act Release No. 57311 (February 12, 
2008), 73 FR 9148 (February 19, 2008) (SR-NSX-2008-03) (amending NSX 
Rule 11.14 to adopt a Zero Display Reserve Order, which includes 
both a pegging option and a post-only option).
    \6\ Id.
    \7\ Id.
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    NASDAQ believes that such orders serve a valid purpose in the 
current market environment. Although Rule 610 limits access fees, 
market participants remain focused on their trading costs, and in a 
pricing environment characterized by fees on one side of a trade being 
used to fund rebates on the other side,\8\ it is entirely 
understandable that some market participants may wish to structure 
their trading activity in a manner that is more likely to avoid a fee 
and earn a rebate. In this respect, the order is conceptually similar 
to a limit order: just as a limit order allows market participants to 
control the price that they will pay or receive for a stock, the 
proposed new order will allow market participants to exercise greater 
control over the fees associated with order execution. Moreover, the 
order type will operate in a manner calculated to require members 
posting the order generally to provide price improvement in order to 
justify the ability to earn a rebate. Thus, as long as a Midpoint Peg 
Post-Only Order is locking a pre-existing Midpoint Order, the order can 
execute only if it offers price improvement. By means of price 
improvement, the market participant effectively shares a portion of its 
rebate with the counterparty with whom it is matched, thereby reducing 
its trading costs as well.
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    \8\ It should be noted that some markets, such as NASDAQ OMX BX, 
the BATS-Y Exchange, the EDGA Exchange, and CBSX, feature fees for 
liquidity providers and rebates for liquidity takers, while all 
other cash equities markets now have a taker fee/maker rebate 
structure.
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2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general, and with Section 
6(b)(5) of the Act,\10\ in particular, in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. Specifically, the Midpoint 
Peg Post-Only Order is designed to provide market participants with 
better control over their execution costs and to provide a means to 
offer price improvement opportunities.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ 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, as amended. The Midpoint Peg 
Post-Only Order will enhance the functionality offered by NASDAQ to its 
members, thereby promoting its competitiveness with other exchanges and 
non-exchange trading venues.

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

    Written comments 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: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has fulfilled this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, 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-2011-059 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2011-059. 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

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those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2011-059 and should 
be submitted on or before June 2, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-11619 Filed 5-11-11; 8:45 am]
BILLING CODE 8011-01-P


