
[Federal Register Volume 76, Number 191 (Monday, October 3, 2011)]
[Notices]
[Pages 61122-61123]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25351]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65405; File No. SR-NASDAQ-2011-105]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change To Establish an Acceptable Trade Range 
for Quotes and Orders Entered on The NASDAQ Options Market

September 27, 2011.

I. Introduction

    On August 2, 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 establish an Acceptable Trade Range (``ATR'') 
for quotes and orders entered on The NASDAQ Options Market (``NOM''). 
The proposed rule change was published for comment in the Federal 
Register on August 18, 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. 65125 (August 12, 
2011), 76 FR 51453 (August 18, 2011) (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to establish an ATR for quotes and orders 
entered on NOM, which is intended to create a level of protection on 
NOM that prevents the market from moving beyond set thresholds. These 
thresholds would consist of a reference price plus or minus set dollar 
amounts based on the nature and premium of the option. This mechanism 
is intended to prevent the NOM trading system from experiencing 
dramatic price swings, which can exist if, for example, a market order 
or aggressively-priced limit order is entered that is larger than the 
total volume of contracts quoted at the top-of-book across all U.S. 
options exchanges.\4\ The Exchange believes that, without the ATR, 
options could execute at prices that have little or no relation to the 
theoretical price of the option, resulting in potential harm to 
investors.\5\
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    \4\ Id.
    \5\ The Exchange provides an example of such executions in the 
Notice. Id.
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A. ATR Operation

    Prior to executing orders received by NOM, an ATR would be 
calculated to determine the range of prices at which orders may be 
executed. When an order is initially received, the range would be 
calculated by adding (for buy orders) or subtracting (for sell orders) 
a value to the National Best Offer (``NBO'') (for buy orders) or the 
National Best Bid (``NBB'') (for sell orders) to determine the range of 
prices that would be valid for execution. A buy (sell) order would be 
allowed to execute up (down) to and including the maximum (minimum) 
price within the ATR (``Threshold Price''). If an order could not be 
executed completely within the ATR, the unexecuted portion of the 
original order would be posted at the Threshold Price for a brief 
period, not to exceed one second (``Posting Period''), to allow the 
market to refresh and determine whether or not more liquidity becomes 
available on NOM (or any other exchange if the order is designated as 
routable) within the posted price of the order before moving on to a 
new Threshold Price. The Threshold Price, at which the order is posted, 
would then become the new reference price,\6\ and a new ATR would be 
calculated.
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    \6\ If a new NBB is received that is greater than a buy order 
posted at the Threshold Price, or a new NBO is received that is 
lower than a sell order posted at the Threshold Price, the new NBB 
(for buy orders) or NBO (for sell orders) would become the new 
reference price.
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    Once the Posting Period has expired, if the order has not been 
fully executed, it would be allowed to execute up to and including the 
Threshold Price of the new ATR. During the Posting Period, NOM would 
display the ATR Threshold Price on one side of the market and the best 
available price on the opposite side of the market using a ``non-firm'' 
indicator. The order setting the ATR retains price/time priority in the 
NOM book.\7\ The Exchange notes that, if NOM were to display trading 
interest available on the opposite side of the market, that trading 
interest would be automatically accessible to later-entered orders 
during the period when the order triggering the ATR is paused.\8\ 
Following the Posting Period, the Exchange would return to a normal 
trading state and disseminate its best bid and offer.
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    \7\ See Notice, supra note 3, 76 FR at 51454.
    \8\ Id.
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    The ATR will be neutral with respect to away markets in that NOM 
will route orders to other destinations to access liquidity priced 
within the ATR, provided the order is designated as routable.\9\ If an 
order remains unexecuted, the process would repeat until it is 
executed, cancelled, or posted at its limit price. If an order is 
routed

[[Page 61123]]

to the full size of an away exchange and additional size remains 
available on NOM, the remaining contracts would be posted on NOM at a 
price that assumes the away market has executed the routed order. The 
Exchange believes this practice of routing and then posting would be 
consistent with the national market system plan governing trading and 
routing of options orders and the NOM policies and procedures that 
implement that plan.\10\
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    \9\ Id.
    \10\ See Notice, supra note 3, 76 FR at 51455, n.9 and 
accompanying text. The Exchange provides examples of this process in 
the Notice. Id. at 51455-56.
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B. Setting ATR Values

    The Exchange represents that the options class premium would be the 
dominant factor in determining the ATR.\11\ The Exchange further 
represents that options with lower premiums tend to be more liquid and 
have tighter bid/ask spreads, while options with higher premiums have 
wider spreads and less liquidity.\12\ Accordingly, the Exchange 
proposes to use a table consisting of several steps based on the 
premium of the option to determine how far the market for a given 
option would be allowed to move. The table(s) would be listed on the 
NASDAQTrader.com website, and any periodic updates to the table(s) 
would be announced via an Options Trader Alert (``OTA'').\13\ The 
Exchange does not anticipate updating the table(s) frequently or 
intraday.\14\ The Exchange will provide sufficient advanced notice of 
changes to the ATR table(s) to its membership via OTAs.\15\
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    \11\ Id. at 51456.
    \12\ Id.
    \13\ The value added to or subtracted from the reference price 
would be set by the Exchange and posted on the Exchange Web site: 
http://www.nasdasqtrader.com.
    \14\ See Notice, supra note 3, 76 FR at 51455.
    \15\ Id.
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    Other market conditions, such as extreme volatility or historically 
low liquidity, would also be considered when determining the ATR. The 
Exchange believes these different market conditions could present the 
need to adjust the ATRs from time to time to ensure a well-functioning 
market.\16\ Without adjustments, the Exchange believes the market could 
become too constrained or, conversely, prone to wide price swings.\17\
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    \16\ Id.
    \17\ Id.
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    The Exchange represents that the ATR would be generally the same 
across all options traded on NOM, but it proposes to maintain 
flexibility to set them separately based on characteristics of the 
underlying security.\18\ Initially, the Exchange expects to set ATRs 
for three categories of options: Standard Penny Pilot, Special Penny 
Pilot (e.g., IWM, QQQQ, SPY), and Non-Penny Pilot.\19\
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    \18\ The Exchange provides examples of options that could 
require this flexibility because of the underlying securities. Id. 
The Exchange notes that the Acceptable Range Test in place at NASDAQ 
OMX PHLX LLC (``Phlx'') currently provides for this flexibility. See 
Phlx Rule 1082(a)(ii)(B)(3)(f).
    \19\ See Notice, supra note 3, 76 FR at 51456.
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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.\20\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\21\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating 
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. The 
Commission also finds that the proposed rule change is consistent with 
the provisions of Section 6(b)(8) of the Act,\22\ which requires that 
the rules of an exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78f(b)(8).
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    The ATR is intended to reduce the negative impacts of sudden, 
unanticipated volatility in individual NOM options, assist in 
preserving an orderly market in a transparent and uniform manner, 
enhance the price-discovery process, increase overall market 
confidence, and promote fair and orderly markets and the protection of 
investors.\23\ The Commission notes that the ATR will be neutral with 
respect to away markets in that NOM will route orders to other 
destinations to access liquidity priced within the ATR, provided the 
order is designated as routable.\24\ The Commission believes that the 
ATR functionality should result in greater continuity in prices as it 
is designed to prevent immediate or rapid executions at far away 
prices; thereby protecting investors and the public interest.
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    \23\ See Notice, supra note 3, 76 FR at 51456.
    \24\ See id. at 51454.
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    The Exchange believes that disseminating a non-firm quotation 
message during the Posting Period would be consistent with its 
obligations under the Quote Rule.\25\ Specifically, the Exchange 
believes that volatility strong enough to trigger the ATR on NOM 
qualifies as an unusual market condition.\26\ The Exchange expects such 
situations to be rare, and the Exchange will set the parameters of the 
ATR at levels that would ensure that it is triggered infrequently.\27\ 
The Commission believes that the Exchange's dissemination of a non-firm 
quotation on the opposite side of the market from the Threshold Price 
of the paused order during the Posting Period is consistent with the 
Quote Rule's provisions regarding non-firm quotations.\28\
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    \25\ Id.
    \26\ Id.
    \27\ Id. The ATR will cause the market to pause for no more than 
one second, which the Exchange notes is a briefer pause than occurs 
in other markets that experience and attempt to dampen volatility. 
For example, the Posting Period would be briefer than the pause 
triggered by the Liquidity Replenishment Point (``LRP'') employed by 
the New York Stock Exchange LLC (``NYSE''). See NYSE Rules 
1000(a)(iv) and 60(d).
    \28\ See 17 CFR 242.602(a)(3)(i)-(ii). Specifically, Rule 
602(a)(3) provides that, if, at any time a national securities 
exchange is open for trading, the exchange determines, pursuant to 
rules approved by the Commission, that the level of trading 
activities or the existence of unusual market conditions is such 
that the exchange is incapable of collecting, processing, and making 
available to vendors the data for a subject security required to be 
made available in a manner that accurately reflects the current 
state of the market on such exchange, such exchange shall 
immediately notify all specified persons of that determination and, 
upon such notification, the exchange is generally relieved of its 
obligations relating to collecting and disseminating quotations.
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IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASDAQ-2011-105) be, and 
hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25351 Filed 9-30-11; 8:45 am]
BILLING CODE 8011-01-P


