
[Federal Register Volume 77, Number 153 (Wednesday, August 8, 2012)]
[Notices]
[Pages 47472-47474]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19363]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67584; File No. SR-NASDAQ-2012-066]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, To 
Adopt a New Market Maker Peg Order Available to Exchange Market Makers

 August 2, 2012.

I. Introduction

    On June 6, 2012, The NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') 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 adopt a new Market Maker Peg Order to provide 
similar functionality as the automated functionality provided to market 
makers under Rules

[[Page 47473]]

4613(a)(2)(F) and (G). The proposed rule change was published for 
comment in the Federal Register on June 20, 2012.\3\ The Commission 
received no comment letters regarding the proposed rule change. 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. 67203 (Jun. 20, 
2012), 77 FR 37086 (``Notice''). The Commission notes that on August 
2, 2012, the Exchange submitted Amendment No. 1 to the proposed rule 
change to make certain amendments that, in part, clarified the 
operation of the new Market Maker Peg Order functionality if, after 
entry, the Market Maker Peg Order is priced based on the 
consolidated last sale and such Market Maker Peg Order is 
established as the National Best Bid or National Best Offer.
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II. Background

    NASDAQ is proposing to adopt a new Market Maker Peg Order (as 
defined in proposed Rule 4751(f)(15)) to provide a similar 
functionality presently available to Exchange market makers under Rules 
4613(a)(2)(F) and (G).\4\ NASDAQ adopted Rules 4613(a)(2)(F) and (G) as 
part of an effort to address issues uncovered by the aberrant trading 
that occurred on May 6, 2010.\5\ According to the Exchange, the 
automated quote management functionality (``AQ'') offered by these 
rules is designed to help Exchange market makers meet the enhanced 
market maker obligations adopted post May 6, 2010,\6\ and avoid 
execution of market maker ``stub quotes'' in instances of aberrant 
trading.\7\ As part of these obligations, NASDAQ requires market makers 
for each stock in which they are registered to continuously maintain a 
two-sided quotation within a designated percentage of the National Best 
Bid and National Best Offer,\8\ as appropriate. According to NASDAQ, AQ 
presents difficulties to market makers in meeting their obligations 
under Rule 15c3-5 under the Act (the ``Market Access Rule'') \9\ and 
Regulation SHO.\10\ Specifically, the current AQ functionality offered 
to market makers reprices and ``refreshes'' a market maker's quote when 
it is executed against, without any action required by the market 
maker. When a market maker's quote is refreshed by the Exchange, 
however, the market maker has an obligation to ensure that the 
requirements of the Market Access Rule and Regulation SHO are met. To 
meet these obligations, a market maker must actively monitor the status 
of its quotes and ensure that the requirements of the Market Access 
Rule and Regulation SHO are being satisfied.
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    \4\ NASDAQ will continue to offer the present automated quote 
management functionality provided to market makers under Rules 
4613(a)(2)(F) and (G) for a period of 3 months after the 
implementation of the proposed Market Maker Peg Order. The purpose 
of this transition period, during which both the present automated 
quote management functionality under Rules 4163(a)(2)(F) and (G) and 
the Market Maker Peg Order will operate concurrently, is to afford 
market makers with the opportunity to adequately test the new Market 
Maker Peg Order and migrate away from the present automated quote 
management functionality under Rules 4613(a)(2)(F) and (G). Prior to 
the end of this three month period, NASDAQ represents that it will 
submit a rule filing to retire the automated quote management 
functionality under Rules 4613(a)(2)(F) and (G). See Notice, supra 
note 3 at 37087.
    \5\ Securities Exchange Act Release No. 63255 (November 5, 
2010), 75 FR 69484 (November 12, 2010) (SR-NASDAQ-2010-115, et al.).
    \6\ Id.
    \7\ For each issue in which a market maker is registered, AQ 
automatically creates a quotation for display to comply with market 
making obligations. Compliant displayed quotations are thereafter 
allowed to rest and are not further adjusted unless the relationship 
between the quotation and its related national best bid or national 
best offer, as appropriate, shrinks to the greater of: (a) 4 
percentage points, or, (b) one-quarter the applicable percentage 
necessary to trigger an individual stock trading pause as described 
in Rule 4120(a)(11), or expands to within that same percentage less 
0.5%, whereupon AQ will immediately re-adjust and display the market 
maker's quote to the appropriate designated percentage. Quotations 
originally entered by market makers are allowed to move freely 
towards the national best bid or national best offer, as 
appropriate, for potential execution. In the event of an execution 
against a System (as defined in Rule 4751(a)) created compliant 
quotation, the market maker's quote is refreshed by AQ on the 
executed side of the market at the applicable designated percentage 
away from the then national best bid (offer), or if no national best 
bid (offer), the last reported sale. Rule 4613(F) & (G).
    \8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR 
242.600.
    \9\ See Notice, supra note 3 at 37087.
    \10\ 17 CFR 242.200 through 204.
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Market Maker Peg Order

    In an effort to simplify market maker compliance with the 
requirements of the Market Access Rule and Regulation SHO, NASDAQ 
proposes to adopt a new order type available only to Exchange market 
makers, which offers AQ-like functionality but also allows a market 
maker to comply with the requirements of the Market Access Rule and 
Regulation SHO. Specifically, NASDAQ proposes to replace AQ 
functionality with the Market Maker Peg Order. The Market Maker Peg 
Order would be a one-sided limit order and similar to other peg orders 
available to market participants in that the order is tied or 
``pegged'' to a certain price,\11\ but it would not be eligible for 
routing pursuant Rule 4758 and would always be displayed and 
attributable (as defined in Rule 4751). The Market Maker Peg Order 
would be limited to market makers and would have its price 
automatically set and adjusted, both upon entry and any time 
thereafter, in order to comply with the Exchange's rules regarding 
market maker quotation requirements and obligations.\12\ It is expected 
that market makers will perform the necessary checks to comply with 
Regulation SHO, as discussed above, prior to entry of a Market Maker 
Peg Order. Upon entry and at any time the order exceeds either the 
Defined Limit, as described in Rule 4613(a)(2)(E), or moves a specified 
number of percentage points away from the Designated Percentage towards 
the then current National Best Bid or National Best Offer, as described 
in Rule 4613(a)(2)(F), the Market Maker Peg Order would be priced by 
the Exchange at the Designated Percentage \13\ away from the then 
current National Best Bid and National Best Offer, or, if no National 
Best Bid or National Best Offer, to the Designated Percentage away from 
the last reported sale from the responsible single plan processor. 
According to NASDAQ, in the absence of a National Best Bid or National 
Best Offer and last reported sale, the order will be cancelled or 
rejected. Adjustment to the Designated Percentage is designed to avoid 
an execution against a Market Maker Peg Order that would initiate a 
single stock circuit breaker. In the event of an execution against a 
Market Maker Peg Order that reduces the size of the Market Maker Peg 
Order below one round lot, the market maker would need to enter a new 
order, after performing the regulatory checks discussed above, to 
satisfy their obligations under Rule 4613.\14\ In the event that 
pricing the Market Maker Peg Order at the Designated Percentage away 
from the then current National Best Bid and National Best Offer, or, if 
no National Best Bid or National Best Offer, to the Designated 
Percentage away from the last reported sale from the responsible single 
plan processor would result in the order exceeding its limit price, the 
order will be cancelled or rejected.
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    \11\ Rule 4751(f)(4) defines Pegged Orders.
    \12\ The Market Maker Peg Order is one-sided so a market maker 
seeking to use Market Maker Peg Orders to comply with the Exchange's 
rules regarding market maker quotation requirements would need to 
submit both a bid and an offer using the order type.
    \13\ The Designated Percentage is the individual stock pause 
trigger percentage under Rule 4120(a)(11) (or comparable rule of 
another exchange) less two (2) percentage points. See Rule 
4613(a)(2)(D).
    \14\ Rule 4613 generally sets forth NASDAQ market maker 
requirements, which include quotation and pricing obligations, and 
the firm quote obligation.
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    NASDAQ is also proposing to allow a market maker to designate an 
offset more aggressive (i.e., smaller) than the Designated Percentage 
for any given Market Maker Peg Order. This functionality will allow a 
market maker

[[Page 47474]]

to quote at price levels that are closer to the National Best Bid and 
National Best Offer if it elects to do so. To use this functionality, a 
market maker must designate the desired offset upon order entry.\15\ 
Thereafter and unlike the default \16\ Market Maker Peg Order, a Market 
Maker Peg Order with a market maker-designated offset will have its 
price automatically adjusted on a tick-by-tick basis by the System to 
maintain the market maker-designated offset from the National Best Bid 
or National Best Offer until the order is executed or cancelled.\17\ In 
the absence of a National Best Bid or National Best Offer, Market Maker 
Peg Orders with a market maker-designated offset will be cancelled or 
rejected. In the event that pricing the Market Maker Peg Order at the 
market maker-designated offset away from the then current National Best 
Bid and National Best Offer would result in the order exceeding its 
limit price, the order will be cancelled or rejected.\18\
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    \15\ If a market maker wishes, it can designate a more 
aggressive bid while using the Defined Percentage and Defined Limit 
for its offer, or vice versa.
    \16\ In the absence of an offset designation, a Market Maker Peg 
Order will default to using the Defined Percentage and Defined 
Limit, and the repricing process whereby, upon reaching the Defined 
Limit, the price of a Market Maker Peg Order bid or offer will be 
adjusted by the System to the Designated Percentage away from the 
then current National Best Bid or National Best Offer, or, if no 
National Best Bid or National Best Offer, to the Designated 
Percentage away from the last reported sale from the responsible 
single plan processor.
    \17\ Market Maker Peg Orders with a market maker-designated 
offset may be able to qualify as bona-fide market making for 
purposes of Regulation SHO, depending on the facts and 
circumstances. A market maker entering such an order must consider 
the factors set forth by the Commission in determining whether 
reliance on the exception from the ``locate'' requirement of Rule 
203 for bona-fide market making is appropriate with respect to the 
particular Market Maker Peg Order and its designated offset. See 
supra note 11.
    \18\ The Market Maker Peg Order will be accepted and executable 
during System hours. During pre and post-market hours, the wider 
Designated Percentage and Defined Limit associated with the 9:30 
a.m.-9:45 a.m. and 3:35 p.m.-4:00 p.m. periods under Rule 
4613(a)(2)(D) and (E) will be applied.
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    NASDAQ claims that this order-based approach is superior in terms 
of the ease in complying with the requirements of the Market Access 
Rule and Regulation SHO while also providing similar quote adjusting 
functionality to its market makers.\19\ NASDAQ also states that market 
makers would have control of order origination, as required by the 
Market Access Rule, while also allowing market makers to make marking 
and locate determinations prior to order entry, as required by 
Regulation SHO. The Exchange claims that this will allow market makers 
to fully comply with the requirements of the Market Access Rule and 
Regulation SHO, as they would when placing any order, while also 
meeting their Exchange market making obligations.\20\
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    \19\ See Notice, supra note 3 at 37088.
    \20\ See id.
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III. Discussion and Commission Findings

    After careful review, 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.\21\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\22\ which 
requires, among other things, the rules of an exchange 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. The 
Commission finds that the proposed rule change also is designed to 
support the principles of Section 11A(a)(1) \23\ of the Act in that it 
seeks to assure fair competition among brokers and dealers and among 
exchange markets.
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    \21\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78k-1(a)(1).
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    The Commission finds that the Exchange's proposal is consistent 
with the Act because it provides a means through which market makers 
may meet their minimum quoting requirements, which may assist in the 
maintenance of fair and orderly markets, provide additional liquidity 
to the Exchange, and prevent excessive volatility. At the same time, 
the proposal is reasonably designed to assist market makers in 
complying with the regulatory requirements of the Market Access Rule 
and Regulation SHO. The Commission notes, however, that the Market 
Maker Peg Order, like the current AQ system, does not ensure that the 
market maker is satisfying the requirements of the Market Access Rule 
or Regulation SHO, including the satisfaction of the locate requirement 
of Rule 203(b)(1) or an exception thereto. The Commission also notes 
that, in the event a Market Maker Peg Order is executed against such 
that the Market Maker Peg Order is reduced in size to below one round 
lot, the market maker would need to perform the necessary regulatory 
checks pursuant to the Market Access Rule and Regulation SHO prior to 
entering a new Market Maker Peg Order.
    The Commission also believes that providing Exchange market makers 
with a transition period, during which they may adequately test the new 
functionality of the Market Maker Peg Order, will serve to minimize the 
potential market impact caused by the implementation of that order 
type. In addition, by allowing market makers to enter a Market Maker 
Peg Order that is priced more aggressively than the Designated 
Percentage, the proposed rules are reasonably designed to provide that 
quotations submitted by market makers to the Exchange, and displayed to 
market participants, bear some relationship to the prevailing market 
price.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change, as modified by Amendment No. 1, 
(SR-NASDAQ-2012-066) be, and hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19363 Filed 8-7-12; 8:45 am]
BILLING CODE 8011-01-P


