
[Federal Register Volume 77, Number 96 (Thursday, May 17, 2012)]
[Notices]
[Pages 29435-29438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11927]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66972; File No. SR-NASDAQ-2012-059]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Establish ``Benchmark 
Orders'' Under NASDAQ Rule 4751(f)

May 11, 2012.
    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 May 1, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by NASDAQ. 
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

    NASDAQ is filing with the Commission a proposed rule change to 
establish various ``Benchmark Orders'' under NASDAQ Rule 4751(f). The 
text of the proposed rule change is available from NASDAQ's Web site at 
http://nasdaq.cchwallstreet.com/Filings/, 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, NASDAQ 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. NASDAQ 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In order to provide enhanced functionality, NASDAQ is proposing to 
establish a set of ``Benchmark Orders,'' a new order type for use in 
trading cash equities. The Benchmark Order will offer members the 
ability to enter a single order in a single security seeking to match 
the performance of a selected benchmark over a pre-determined period of 
time. The Benchmark Order will provide entering firms additional tools 
to manage large trades, including potentially reducing price impact 
from such large trades. These Benchmark Orders will also assist 
entering firms by increasing flexibility to manage their trading 
interest intraday. To further assist members, NASDAQ will provide those 
entering Benchmark Orders with detailed analytics with which to measure 
the performance of Benchmark Orders vis [agrave] vis the relevant 
benchmarks.
    The Benchmark Order will not itself be available for execution, but 
instead will be used by a sub-system of the trading system to generate 
a series of ``Child Orders'' of the types that already exist in the 
current NASDAQ rules. The Child Orders of a Benchmark Order may be 
executed within the NASDAQ system under NASDAQ's existing processing 
rules, or made available for routing under NASDAQ's current routing 
rules.\3\

[[Page 29436]]

All Child Orders of Benchmark Orders will comport with NASDAQ's 
existing rules, including (for example) rules designed to enforce 
compliance with Regulation NMS and the SEC Market Access Rule.
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    \3\ As with routable orders today, Child Orders entered onto the 
NASDAQ book will be in the members' name, while orders routed to 
other venues will be performed by NASDAQ Execution Services 
(``NES'').
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    Initially, NASDAQ will offer three underlying benchmarks for the 
Benchmark Orders: Volume Weighted Average Price (``VWAP''), Time 
Weighted Average Price (``TWAP'') and Percent of Volume (``POV''). In 
addition to order entry information common to all order types of all 
attributes--security, buy/sell side, shares, and price--a member 
choosing the Benchmark Order will enter order information relevant to 
the Benchmark Order attribute, including (for example) the benchmark 
selected, the start time and duration of the order, and the percent of 
volume target (if any). NASDAQ members may enter Benchmark Orders via 
an existing NASDAQ protocol and an existing NASDAQ port; no new 
protocols or ports will be required.\4\ Benchmark Orders will be 
assigned unique identification numbers, as is the case for all orders 
in the NASDAQ system, used for tracking purposes as described below.
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    \4\ Currently, orders that may become available for routing, 
including Benchmark Orders if approved, are entered using either 
NASDAQ's proprietary INET FIX or RASHport protocol.
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    Benchmark Orders will not be executed by the NASDAQ matching 
engine, but will upon entry be directed to a system application 
dedicated to processing Benchmark Orders (``Application'').\5\ The 
Application will process the Benchmark Order in accordance with pre-
determined logic designed to achieve benchmark performance based upon 
the entering firm's instructions. For example, consider a Benchmark 
Order containing instructions for the Application to buy 5,000 shares 
and achieve a VWAP in Security ABCD over the period from 9:30 a.m. to 
10:00 a.m. The Application logic will include the calculation of a 
VWAP, the method for replicating that VWAP, the order types necessary 
to achieve that replication, and the prices at which such orders would 
need to execute. The Application will generate such Child Orders as are 
necessary to achieve the desired benchmark selected by the entering 
firm. Child Orders will be formatted using already-approved NASDAQ 
order types and times in force as set forth in NASDAQ Rule 4751.\6\ 
Child Orders will also be marked with unique identifiers, as is the 
case for all orders, for use in linking Child Orders to Benchmark 
Orders. Other than creating a Benchmark Order type for entry purposes, 
no new order types or times in force are being proposed.
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    \5\ The relationship between NASDAQ and the Application 
technology provider is described in more detail below.
    \6\ Child Orders may be generated by the System using 
preexisting order types in the RASH system, including previously 
filed strategies (e.g. SCAN, STGY, ISNY). Child Orders may be 
generated with instructions available to pre-existing order types 
including but not limited to Limit Orders, Market Pegged Orders, 
Primary Pegged Orders, Midpoint Pegged Orders, orders with 
instructions to participate in opening or closing crosses, Post-Only 
Orders, Intermarket Sweep Orders, Minimum Quantity Orders, Non-
Display Orders, and Directed Orders.
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    The Application will not be capable of executing either Benchmark 
Orders or Child Orders but will instead send Child Orders, using the 
proper system protocol,\7\ to the NASDAQ matching engine or to the 
NASDAQ router as needed to complete the Benchmark Order.\8\ Thus, 
returning to the previous example of a Benchmark Order to buy 5,000 
shares at the VWAP, the Application may determine it is necessary to 
send a marketable limit order to buy 1,000 shares of security ABCD at 
$10.00 in order to complete the desired VWAP order. The Application 
will format the necessary orders, perhaps two orders for 500 shares 
each, and send those orders to the NASDAQ matching engine because 
NASDAQ is displaying 900 shares of ABCD at $10.00. The Application will 
continue to monitor market conditions, recalculate the VWAP as 
necessary, monitor the Child Orders generated and executions received 
(via standard system messaging and tracking processes) and produce new 
Child Orders as necessary to achieve the desired overall execution. 
Benchmark Orders will be available for entry and execution during the 
system hours specified in NASDAQ rules. The parent order will remain 
active in the NASDAQ system until fully executed, expired, or cancelled 
by the entering member.\9\
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    \7\ Benchmark Orders may be entered using the INET FIX or NASDAQ 
RASH protocols. Child Orders will use available protocols in the 
same way that similar orders use them independent of Benchmark 
Orders. Different protocols offer members different means of setting 
parameters based on the technological characteristics of the 
protocols.
    \8\ Child Orders that require routing will be routed by NES, 
NASDAQ's wholly-owned routing broker-dealer, according to the same 
rules and processes applicable to all orders routed from NASDAQ 
pursuant to NASDAQ Rule 4758.
    \9\ In the event a member cancels an order, that member will be 
responsible for all executions completed prior to the time of 
cancellation, as well as all fees appurtenant to such executions.
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    Child Orders of Benchmark Orders will be processed in an identical 
manner to orders generated independently of a Benchmark Order. Trade 
reporting, OATS reporting, and clearing of Child Orders and trades will 
occur in the same manner as currently existing order types. 
Additionally, pre-trade checks required by the Market Access Rule (SEC 
Rule 15c3-5) will be made on both Benchmark Orders submitted by members 
as well as Child Orders created by the Application. All Child Orders 
will be checked for compliance with Regulation NMS prior to being 
routed. All fees applicable to existing orders and trades will apply to 
Child Orders.\10\ The only difference in processing of Child Orders vis 
[agrave] vis independently formatted orders of the same type will be 
the system messages transmitted between the Application and other parts 
of the NASDAQ system.
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    \10\ NASDAQ has not determined the level of fee to assess for 
the execution of a Benchmark Order. When NASDAQ determines the 
proper fee for the Benchmark Order, it will file a proposed rule 
change as required.
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    NASDAQ considers the Application to be a functional offering of the 
NASDAQ Stock Market, similar to other functions that process member 
trading interest, including other order types, order routing and order 
matching capabilities. Thus, although the technology will be licensed 
from a third party (``Third Party Provider''), the Application will be 
integrated closely with the NASDAQ system and provided to members 
subject to NASDAQ's obligations and responsibilities as a self-
regulatory organization.
    NASDAQ has taken steps to provide that the Application performs to 
the standards NASDAQ sets for itself and that that the SEC sets for all 
SROs. For example, NASDAQ will test the Application rigorously and 
regularly to ensure that the Application is performing the desired 
calculations and that it is doing so in a manner that complies with 
applicable SEC regulations and NASDAQ rules. NASDAQ will monitor the 
Application performance on a real-time and continuous basis just as it 
monitors all functions performed by the NASDAQ system. NASDAQ will have 
access to the technology, employees and books and records of the third 
party provider that are related to the Application and its interaction 
with NASDAQ and NASDAQ members.
    The Third Party Provider will have no discretion with respect to 
Benchmark Orders and will have no authority other than to apply the 
licensed technology to such Benchmark Orders it receives from NASDAQ. 
Neither the Third Party

[[Page 29437]]

Provider nor its employees will have information or access to 
information about NASDAQ members that submit Benchmark Orders. 
Benchmark Orders will be received by NASDAQ and not by the Third Party 
Provider, and messages sent from NASDAQ to the Third Party Provider 
will contain no information by which the Third Party Provider can 
identify the specific NASDAQ member that entered the order(s). The 
Third Party Provider will store messages related to NASDAQ Benchmark 
Orders only for the purposes of providing end-of-day analytics and to 
comply with applicable books and records requirements.
    The Third Party Provider will have no actionable advantage over 
NASDAQ members with respect to the NASDAQ system. The third party 
hardware and software will be subordinate to the NASDAQ matching engine 
and router. The Application will not itself be capable of executing 
orders; it will only generate messages and instructions to be carried 
out by the NASDAQ system in accordance with existing NASDAQ rules. 
NASDAQ will maintain control of and responsibility for the Application 
and the NASDAQ system. The Third Party Provider has a registered 
broker-dealer affiliate; however that affiliate will be performing no 
broker-dealer functions with respect to NASDAQ Benchmark Orders.\11\ 
The sole function to be performed by the Third Party Provider's broker-
dealer affiliate will be to accept from NASDAQ post-execution per-share 
compensation related to Benchmark Orders.
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    \11\ As described above, Child Orders generated by the 
Application that require routing will be routed by NES and not by 
the Third Party Provider or its broker-dealer affiliate. As a 
result, the Third Party Provider and affiliate will have no 
reporting obligations with respect to Benchmark Orders under 
NASDAQ's OATS rules. See OATS Technology Specifications Scenario 
4.4.22 (Routing Services Provided By Members).
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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,\12\ in general, and with 
Section 6(b)(5) of the Act,\13\ 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.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
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    Specifically, NASDAQ believes that the Benchmark Order is 
consistent with and supports the goals of Section 6(b)(5) because it 
facilitates transactions in securities and improves trading within the 
national market system. The Benchmark Order will permit members to 
achieve on an exchange via a single order type what previously has 
required access to multiple venues using multiple order types. NASDAQ 
will enable members to leverage NASDAQ's existing access and existing 
order types to make benchmarking easier and more efficient. For the 
members that already have such capabilities, the Benchmark Order will 
represent another option. Additionally, the Benchmark Order will expand 
benchmarking capability to firms that currently lack it or lack an 
exchange-based alternative.
    NASDAQ further believes that the Benchmark Order will achieve new 
efficiency and cost savings for members. For NASDAQ members that rely 
on NASDAQ to help manage a significant percentage of their order flow, 
the Benchmark Order will extend that capability and thereby allow 
members to manage more order flow at a single trading platform. Members 
that choose to use Benchmark Orders will use the same ports and 
connectivity and the same programming protocols that they currently use 
for other NASDAQ orders. Additionally, because Benchmark Orders will be 
based on the same market data that NASDAQ uses today, members should 
incur no additional charges for market data feeds.
    Finally, the Benchmark Order will increase transparency because 
NASDAQ will offer members detailed analytics regarding the performance 
of their Benchmark Orders. These analytics will be a ``scorecard'' not 
available today against which members will measure the actual 
performance of Benchmark Orders versus the selected benchmark. Members 
may use this tool to experiment with Benchmark Orders and, if 
successful, determine to enter additional Benchmark Orders or to 
refrain from entering them. The analytics will be limited to 
information concerning the members' own executions and as such will 
include no market data that is proprietary to another member.

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. To the contrary, 
the establishment of Benchmark Orders on NASDAQ will enhance NASDAQ's 
ability to compete with similar functionality that already is widely 
dispersed in the industry both among members and trading venues. The 
Benchmark Order is a voluntary offering; voluntary on the part of the 
Exchange which is not required to offer it and voluntary on the part of 
members that are not required to use it. If the predicted enhancements 
and improvements of the Benchmark Order do not materialize, members 
will simply choose to ignore it. NASDAQ's decision to offer the 
Benchmark Order is a further indication of the competitiveness of the 
market for trading platforms. Continued improvements and enhancements 
such as the Benchmark Order are necessary in order to attract order 
flow and execute transactions. This need is heightened because the 
functionality underlying the Benchmark Order has for some time been 
made available by alternative trading systems that perform functions 
similar to NASDAQ but that have been exempted from the requirements of 
filing proposed rule changes, among others.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

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

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     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-059 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-2012-059. This 
file number should be included on the subject line if email 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 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 
10:00 a.m. and 3:00 p.m. Copies of the 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-2012-059 and should 
be submitted on or before June 7, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11927 Filed 5-16-12; 8:45 am]
BILLING CODE 8011-01-P


