
[Federal Register Volume 76, Number 94 (Monday, May 16, 2011)]
[Notices]
[Pages 28257-28260]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11919]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64463; File No. SR-NASDAQ-2011-037]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Order Approving Proposed Rule Change To Modify Chapter V, Section 4 and 
Chapter VI, Section 8 of the Exchange's Rules Relating to Opening and 
Halt Crosses on the NASDAQ Options Market

May 11, 2011.

I. Introduction

    On March 15, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the procedures for the opening of 
trading at the start of the trading day and at the resumption of 
trading following a trading halt on the NASDAQ Options Market 
(``NOM''). The proposed rule change was published for comment in the 
Federal Register on April 4, 2011.\3\ The Commission received no 
comment letters regarding the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64143 (March 29, 
2011), 76 FR 18589 (April 4, 2011) (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to modify Chapter V, Section 4 and Chapter 
VI, Section 8 of the Exchange's rules (``NOM Rules'') governing the 
opening of trading at the start of the trading day and at the 
resumption of trading following a trading halt on NOM. Specifically, 
the Exchange proposes to: (1) Eliminate one tie-breaker and modify a 
second tie-breaker used to establish the Current Reference Price and 
cross price; (2) modify the circumstances whereby the Exchange 
disseminates an indicative indicator of ``market;'' (3) change the 
start time for imbalance and indicative data dissemination; (4) clarify 
when an Order Imbalance Indicator is disseminated; and (5) establish a 
halt cross.

A. Elimination of the Order Imbalance Tie-Breaker and Modification of 
the Mid-Point Tie-Breaker

    NOM currently employs a series of tie-breakers that resolve 
instances where multiple prices satisfy the conditions for

[[Page 28258]]

executing the opening cross. These tie-breakers govern the calculation 
of the Current Reference Price, which is disseminated to market 
participants prior to the execution of the opening cross, and the 
calculation of the actual cross price.\4\ The tie-breakers are criteria 
that operate in a hierarchy. If one and only one price satisfies the 
first criterion, the system has no need to consider the second tie-
breaker, and, instead, the system will execute the cross. Conversely, 
if multiple prices satisfy the first criterion, the algorithm turns to 
the second criterion, and, if multiple prices satisfy the second 
criterion, the algorithm then turns to the third criterion. Currently, 
the first tie-breaker is the single price at which the maximum number 
of contracts of Eligible Interest \5\ can be paired at or within the 
National Best Bid and Offer (``NBBO'').\6\
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    \4\ See NOM Rules Chapter VI, Section 8(a)(2)(A), (b)(2).
    \5\ ``Eligible Interest'' is any quotation or any order that may 
be entered into the system and designated with a time-in-force of 
IOC, DAY, GTC, EXPR. See NOM Rules Chapter VI, Section 8(a)(4).
    \6\ See NOM Rules Chapter VI, Section 8(a)(2)(A)(i), (b)(2)(A).
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    The Exchange proposes to eliminate what currently serves as the 
second tie-breaker (the ``Order Imbalance Tie-Breaker'').\7\ 
Specifically, under this second tie-breaker, when more than one price 
satisfies the first condition for the opening cross, the system will 
choose the price which minimizes the order imbalance remaining if the 
cross were to be executed.
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    \7\ See NOM Rules Chapter VI, Section 8(a)(2)(A)(ii), (b)(2)(B).
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    The Exchange represents that it has determined to eliminate the 
Order Imbalance Tie-Breaker because it has not proven useful in 
augmenting price discovery prior to the cross or in operating an 
effective opening cross.\8\ The Exchange noted that it initially 
adopted the Order Imbalance Tie-Breaker based upon its successful use 
in the equities opening cross.\9\ However, the Exchange believes that, 
in its experience, the Order Imbalance Tie-Breaker has not performed 
well for the options cross because imbalances occur less often in the 
options market and such imbalances generally are much smaller in size 
than in the equities market.\10\ As a result, the Exchange believes 
that the size of an imbalance in an options cross rarely provides a 
meaningful basis for distinguishing between multiple prices at which a 
cross could occur and that elimination of the Order Imbalance Tie-
Breaker would not hinder price discovery and would allow the Exchange 
to focus the cross on the most relevant criteria.\11\
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    \8\ See Notice, supra note 3, 76 FR at 18589-90.
    \9\ See id. at 18590.
    \10\ See id.
    \11\ See id.
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    In addition, the Exchange is proposing to modify the current third 
tie-breaker (the ``Mid-Point Tie-Breaker'').\12\ Rather than choosing 
the mid-point of the NBBO, as happens today under this tie-breaker, the 
Exchange would choose a price that it believes more accurately 
represents the supply and demand in the market at the time of reference 
price dissemination and/or auction execution.\13\ To achieve that end, 
the Exchange would set a minimum threshold price, based on the higher 
of the last-crossed NOM offer or the National Best Bid, and a maximum 
threshold price, based on the lower of the last-crossed NOM bid or the 
National Best Offer. The mid-point (in $0.01 increments) of those 
threshold prices would be the Current Reference Price or opening cross 
price if this Mid-Point Tie-Breaker were reached.\14\ The Exchange 
believes that this formulation would improve price discovery and 
execution quality.\15\
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    \12\ See NOM Rules Chapter VI, Section 8(a)(2)(A)(iv), 
(b)(2)(C).
    \13\ See Notice, supra note 3, 76 FR at 18590.
    \14\ The Exchange provides three examples, illustrating the 
operation of this new Mid-Point Tie-Breaker in the Notice. See id.
    \15\ See id.
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B. Modification of Indicative Indicator Dissemination of ``Market''

    The indicative price is the price at which the NOM opening cross 
would occur if the opening cross were to occur at that time.\16\ The 
Exchange disseminates an indicative indicator for ``market buy'' or 
``market sell'' if marketable buy (sell) contracts would remain 
unexecuted above (below) the Near or Far Clearing Prices, 
respectively.\17\ The Exchange proposes to modify when an indicative 
inidcator is disseminated with a price of ``market buy'' or ``market 
sell.'' \18\ First, such message would be disseminated when there is 
trading interest with a market price that is not offset, not when there 
is marketable interest, as is currently the practice. Second, whether 
NOM disseminates an indicative price of ``market'' would no longer 
depend upon the available interest being priced lower or higher than 
the Near or Far Clearing Prices, respectively. The Exchange believes 
this formulation of ``market'' will reduce any potential for confusion 
about its dissemination practices.\19\
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    \16\ See NOM Rules Chapter VI, Section 8(a)(E).
    \17\ See NOM Rules Chapter VI, Section 8(a)(E)(iii). The Near 
and Far Clearing Prices are defined in NASDAQ Rule 4752. For the 
purpose of NOM Rules Chapter VI, Section 8, both are equal to the 
Current Reference Price. See NOM Rules Chapter VI, Section 
8(a)(2)(E)(i)-(ii).
    \18\ NOM Rules Chapter VI, Section 8(a)(2)(E)(iii) governs when 
this dissemination occurs.
    \19\ See Notice, supra note 3, 76 FR at 18590.
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C. Change of the Start Time for Data Dissemination

    The Exchange also proposes to change the time at which imbalance 
and indicative price data will begin to be disseminated.\20\ Currently, 
the Exchange begins indicative data dissemination at 9:25 a.m. EST. 
However, the Exchange represents that it has received feedback from 
market participants that certain option classes might benefit from a 
different dissemination window due to the trading characteristics of 
such option classes.\21\ Accordingly, the Exchange proposes to commence 
dissemination of the imbalance and indicative price data anywhere 
between 9:20 a.m. and 9:28 a.m. EST. The initial default time to begin 
dissemination will remain at 9:25 a.m. EST, but the Exchange would have 
discretion to pick a different time for an option class. When the 
Exchange does change the start time for data dissemination, the new 
start time of imbalance and data dissemination for such class would be 
published in advance and with equal access on the NASDAQ Trader Web 
ite.\22\ The Exchange represents that deviations from the default start 
time of 9:25 a.m. EST would be rare.\23\
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    \20\ NOM Rules Chapter VI, Section 8(b)(1) governs when this 
dissemination occurs.
    \21\ See Notice, supra note 3, 76 FR at 18590.
    \22\ See id.
    \23\ See id.
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D. Clarification of Dissemination of the Order Imbalance Indicator

    The Exchange proposes to clarify when an Order Imbalance Indicator 
will be disseminated just prior to the opening cross.\24\ Currently, 
any time an imbalance remains just prior to the opening cross, the 
Exchange disseminates a final Order Imbalance Indicator. As proposed, 
NASDAQ would disseminate this final Order Imbalance Indicator only when 
the imbalance contains routable trading interest that is marketable 
against the NBBO. The Exchange believes non-routable interest is best 
served by being posted on NOM after execution of the opening cross.\25\ 
Once the cross is

[[Page 28259]]

executed and the order is posted, that trading interest would be 
disseminated as part of the Exchange's best bid or offer via the 
consolidated data feed. The Exchange believes this broad dissemination 
would better advertise the trading interest and thereby increase the 
likelihood of an execution.\26\ Additionally, the Exchange proposes to 
clarify that, after the opening cross is executed, all orders in the 
imbalance would be cancelled, routed, or posted in accordance with the 
entering party's instructions.
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    \24\ NOM Rules Chapter VI, Section 8(b)(5) governs when this 
dissemination occurs.
    \25\ See Notice, supra note 3, 76 FR at 18590. The Exchange 
states that the goal of NOM's open is to attract as much liquidity 
as possible to interact with any orders that are marketable at the 
time of the open. See id. The Exchange believes that the change to 
post non-routable orders (at the NBBO) rather than disseminating 
additional imbalance messages provides more advertisement for the 
order because it is broadcast over the consolidated quote feed 
rather than just NASDAQ's proprietary market data feeds. See id. 
Additionally, for routable orders, the Exchange would continue the 
current process of advertising the order(s) via an imbalance message 
on its proprietary market data feeds rather than opening immediately 
and routing the order away. By doing this, the Exchange represents 
that its goal is to get the order a price that is equal to or better 
than the away quoted price. See id.
    \26\ See id.
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E. Establishment of a Halt Cross

    Finally, in order to provide a more orderly opening of the market 
after a trading halt, the Exchange proposes to establish an opening 
cross after the termination of a trading halt.\27\ The opening cross 
following a trading halt would operate in the same manner as the 
opening cross at the start of the trading day, including dissemination 
of the Order Imbalance Indicator, matching algorithm, and posting or 
routing of interest that remains unexecuted following execution of the 
cross. The opening cross for halted options would differ from the 
opening cross only in the time at which it occurs.\28\
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    \27\ When the Exchange first proposed rules for NOM, it planned 
to resume trading after a halt by conducting a ``Halt Cross.'' In 
response to comments received on that proposal that the market 
relies on price discovery from the underlying security rather than 
on the availability of interest in a cross, the Exchange determined 
to remove the Halt Cross. See Securities Exchange Act Release Nos. 
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004) and (SR-NASDAQ-2007-080) (approval order regarding NOM 
Rules including Chapters III and XIV).
    \28\ See NOM Rules Chapter V, Section 4 (providing that trading 
in an option that has been the subject of a halt shall be resumed 
upon the determination by Nasdaq Regulation that the conditions 
which led to the halt are no longer present or that the interests of 
a fair and orderly market are best served by a resumption of 
trading).
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III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\29\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\30\ which 
requires, among other things, that the rules of an exchange be 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.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed elimination of the Order 
Imbalance Tie-Breaker and modification of the Mid-Point Tie-Breaker are 
consistent with the Act. Although the Exchange is eliminating the Order 
Imbalance Tie Breaker and modifying the Mid-Point Tie Breaker, the 
Exchange will continue to employ a series of tie-breakers to determine 
the Current Reference Price and the opening cross price where multiple 
prices satisfy the conditions for executing the opening cross. The 
Exchange represents that, since NOM was launched on March 31, 2008, it 
has monitored the operation of the market to identify instances where 
market efficiency can be enhanced.\31\ According to the Exchange, the 
Order Imbalance Tie-Breaker has not proven useful in augmenting price 
discovery prior to the opening cross or in operating an effective 
opening cross.\32\ The Exchange also believes that the proposed 
modification to the Mid-Point Tie-Breaker will more accurately 
represent the supply and demand in the market at the time of reference 
price dissemination and/or auction execution.\33\ The Commission 
believes that the elimination of the Order Imbalance Tie Breaker is 
reasonable, given that the Exchange has not found it to be useful in 
augmenting price discovery. The Exchange is not proposing to change the 
primary criteria whereby the Current Reference Price is calculated to 
be the single price at which the maximum number of contracts of 
Eligible Interest can be paired at or within the NBBO. If more than one 
price satisfies this condition, the Exchange will continue to employ a 
series of iterative tie-breakers that are designed to facilitate an 
orderly opening. Further, the proposed change to the Mid-Point Tie-
Breaker is intended to aid in facilitating orderly openings at prices 
reflective of the market. Accordingly, as revised, the Exchange's 
opening process will continue to be designed to facilitate orderly 
openings and encourage price discovery and liquidity.
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    \31\ See, e.g., Securities Exchange Act Release Nos. 57822 (May 
15, 2008), 73 FR 29800 (May 22, 2008)) (SR-NASDAQ-2008-045); 57977 
(June 17, 2008), 73 FR 35429 (June 23, 2008) (SR-NASDAQ-2008-052); 
60905 (Oct. 30, 2009), 74 FR 57544 (Nov. 6, 2009)) (SR-NASDAQ-2009-
033). See also Notice, supra note 3, 76 FR at 18589.
    \32\ See Notice, supra note 3, 76 FR at 18589-90.
    \33\ See id.
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    The Commission finds that the proposed modification to the 
dissemination of an indicative indicator of ``market buy'' or ``market 
sell'' is consistent with the Act. The Exchange proposes to disseminate 
the indicative message of ``market buy'' or ``market sell'' when there 
is interest with a market price that is not offset, irrespective of the 
Near or Far Clearing Prices. Currently, such message is disseminated 
only when there is marketable interest depending on whether the 
available interest is lower or higher than the Near or Far Clearing 
Prices, respectively. This change is intended to reduce any potential 
for confusion regarding the meaning of an indicator that specifies 
``market.'' \34\ The Commission believes that NASDAQ's revised 
dissemination of a ``market'' indicator in connection with its opening 
process will benefit investors and improve transparency by providing 
market participants with useful information during the opening cross.
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    \34\ See Notice, supra note 3, 76 FR at 18590.
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    The Commission finds that the proposed change to allow NOM to 
select a different start time for imbalance and indicative data 
dissemination for a class within the window of 9:20 a.m. and 9:28 a.m. 
EST is consistent with the Act. Currently, the Exchange begins 
indicative data dissemination at 9:25 a.m. EST as previously approved 
by the Commission.\35\ The Exchange represents that it will continue to 
use 9:25 a.m. EST as the default start time and that changes to this 
default start time will be rare. The Commission notes that, if the 
Exchange decides to change the start time, then it will publish the new 
time of imbalance and indicative price data dissemination commencement 
in advance on the publicly accessible NASDAQ Trader website. This 
change will give the Exchange more flexibility to determine the most 
appropriate time for data dissemination in an option class that NASDAQ 
believes will be most conducive to price discovery based on the trading 
characteristics of such option class. Further, the Commission believes 
that the advance notice on the NASDAQ Trader website of any change in 
the commencement of dissemination of imbalance and indicative price 
data will continue to ensure certainty with respect to the time of 
dissemination.
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    \35\ See id.

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[[Page 28260]]

    The Commission finds that the proposed modification to the 
dissemination of the final Order Imbalance Indicator is consistent with 
the Act. Currently, any time an imbalance remains just prior to the 
opening cross, the Exchange disseminates one last Order Imbalance 
Indicator. The Exchange proposes to disseminate that final Order 
Imbalance Indicator only when the imbalance contains routable trading 
interest that is marketable against the NBBO. After the opening cross 
is executed, any non-routable interest that is not cancelled will be 
posted. As such, dissemination of this interest will be broadcast via 
the consolidated quote. The effect of this change is that the Exchange 
will not disseminate the very last Order Imbalance Indicator that it 
would otherwise have disseminated right before the opening cross when 
the imbalance only contains non-routable interest. While this change 
could have the effect of reducing the last message on imbalances that 
the Exchange currently sends immediately before the opening cross, it 
also mitigates message traffic for orders that the Exchange expects 
would post immediately thereafter. The Commission believes this change 
will not adversely affect transparency with respect to imbalance 
information immediately prior to the opening cross.
    The Commission finds that the proposed establishment of an opening 
cross following a trading halt is consistent with the Act. The Exchange 
believes that conducting an opening cross will provide a more orderly 
opening of the market after a halt, particularly to the extent that NOM 
attracts higher levels of liquidity than it did previously.\36\ The 
Commission notes that the halt cross will operate in the same manner as 
the opening cross. It is also consistent with the use of an opening 
cross following a trading halt on NASDAQ's equities platform.\37\ The 
Commission notes that similar auctions are used by other options 
markets following a trading halt.\38\ The Commission believes that the 
adoption of a halt cross is designed to provide for a fair and orderly 
re-opening of the market and contribute to the quality of executions 
following a trading halt.
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    \36\ See id. at 18591.
    \37\ See NASDAQ Rule 4753.
    \38\ See, e.g., Securities Exchange Act Release No. 54238 (July 
28, 2006), 71 FR 44758, 44762 (August 7, 2006) (SR-NYSEArca-2006-13) 
(approving the OX Trading Platform, including trading auctions 
following halts, for NYSE Arca, Inc. (``NYSE Arca'')); Securities 
Exchange Act Release No. 59472 (February 27, 2009), 74 FR 9843, 9851 
(March 6, 2009) (SR-NYSEALTR-2008-14) (finding that NYSE Alternext 
US LLC's (now NYSE Amex LLC) rules on trading auctions and 
procedures for trading halts are closely modeled on the rules of 
NYSE Arca and consistent with the Act).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-NASDAQ-2011-037) be, and 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-11919 Filed 5-13-11; 8:45 am]
BILLING CODE 8011-01-P


