
[Federal Register Volume 79, Number 193 (Monday, October 6, 2014)]
[Notices]
[Pages 60207-60211]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-23703]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73266; File No. SR-NASDAQ-2014-095]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Provide a New Optional 
Functionality to Minimum Quantity Orders

September 30, 2014.
    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 September 18, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III, 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

    NASDAQ proposes a rule change to provide a new optional 
functionality to Minimum Quantity Orders. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to provide a new optional functionality 
to Minimum Quantity Orders.\3\ A Minimum Quantity Order allows a market 
participant to specify a minimum share amount at which it will execute. 
For example, a market participant seeking to buy or sell a large 
position may desire to execute only if a large quantity of shares can 
be traded to reduce the price impact of the security being bought or 
sold. A Minimum Quantity Order will not execute unless the volume of 
contra-side liquidity available to execute against the order meets or 
exceeds the designated minimum. When a Minimum Quantity Order is 
received by the Exchange, it will execute immediately \4\ if there is 
sufficient liquidity available on the Exchange within the limit price 
of the Minimum Quantity Order. Furthermore, the order will execute if 
the sum of the shares of one or more orders is equal to or greater than 
its minimum quantity. In the case of multiple orders being aggregated 
to meet the minimum

[[Page 60208]]

quantity, each contra-side order creates a separate execution and thus 
there can be multiple executions that, in aggregate, equal or exceed 
the minimum quantity. If a Minimum Quantity Order does not execute 
immediately due to lack of contra-side liquidity that is equal to or 
greater than the designated minimum, the order will post \5\ to the 
NASDAQ order book as a Non-Displayed Order.\6\ Once posted, a Minimum 
Quantity Order will execute only if an incoming order is marketable 
against the resting Minimum Quantity Order and is equal to or greater 
than the minimum quantity set on the resting Minimum Quantity Order. 
Once posted, multiple potential executions cannot be aggregated to meet 
the minimum quantity requirement of the Minimum Quantity Order. If a 
Minimum Quantity Order executes partially and the number of shares 
remaining is less than the minimum quantity of the order, the minimum 
quantity of the order is reduced to the remaining share size. If a 
Minimum Quantity Order is received that is marketable against a resting 
contra-side order with size that does not meet the minimum quantity 
requirement, the Minimum Quantity Order will be posted on the book as a 
Non-Displayed Order at the locking price.\7\ For example, if a Minimum 
Quantity Order is received to buy 1,000 shares at $10 with a minimum 
quantity restriction of 500 shares and there is a resting sell order 
for 300 shares at $10, the Minimum Quantity Order will be posted as a 
Non-Displayed Order at $10. Furthermore, the Exchange notes that a 
subsequent order without a minimum quantity restriction that is 
marketable against the resting contra-side interest will result in an 
execution because the market participant entering the Minimum Quantity 
Order has expressed its intention not to execute against liquidity 
below a certain minimum size, and therefore cedes execution priority to 
any new orders that would otherwise have a lower priority.
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    \3\ Rule 4751(f)(5).
    \4\ A Minimum Quantity Order would satisfy the requirements of 
Regulation NMS and not trade through a protected quotation.
    \5\ Orders post to the NASDAQ book only if they are designated 
with a time in force that allows for posting. For example, an IOC 
order never posts to the book.
    \6\ A Non-Displayed Order is a limit order that is not displayed 
in the NASDAQ system, but nevertheless remains available for 
potential execution against all incoming orders until executed in 
full or cancelled. See Rule 4751(e)(3). Minimum Quantity Orders are 
always Non-Displayed when posted on the Exchange book.
    \7\ SEC Rule 610(d) under Regulation NMS restricts displayed 
quotations that lock or cross protected quotations in NMS stock, but 
does not apply to non-displayed trading interest, like a resting 
Minimum Quantity Order. See 17 CFR 242.610(d).
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    NASDAQ is proposing to add a new optional functionality to further 
enhance the utility of Minimum Quantity Orders to market 
participants.\8\ In particular, some market participants have noted 
that they avoid sending large Minimum Quantity Orders to NASDAQ out of 
concern that such orders may interact against small orders entered by 
professional traders. These participants are concerned that such 
interaction may negatively impact the execution of their larger orders. 
Often institutional orders are much larger in size than the average 
order in the marketplace. Furthermore, in order to facilitate the 
liquidation or acquisition of a large position, multiple orders are 
submitted into the market, which although larger than the average order 
in the market, only represent a small proportion of the overall 
institutional position to be executed. The various strategies used to 
execute large size are based on a desire to limit price movement of the 
stock the institution is pursuing. Executing in small sizes, even if in 
aggregate it meets a minimum quantity designation, may impact the 
market such that the additional orders that the institution has yet to 
submit to the market may be more costly to execute. If an institution 
is able to execute in larger sizes, the contra-party to the execution 
is less likely to be a participant that reacts to short term changes in 
the stock price and as such the price impact to the stock could be less 
acute when larger individual executions are obtained by the 
institution.\9\ As a consequence of this concern, these orders are 
often executed away from the Exchange in dark pools, at least some of 
which have the functionality proposed herein,\10\ or via broker-dealer 
internalization.
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    \8\ The option is available at the port level. Accordingly, all 
orders entered through a particular port will receive the selected 
functionality. All trading ports default to the current 
functionality.
    \9\ The Commission has long recognized this concern: ``Another 
type of implicit transaction cost reflected in the price of a 
security is short-term price volatility caused by temporary 
imbalances in trading interest. For example, a significant implicit 
cost for large investors (who often represent the consolidated 
investments of many individuals) is the price impact that their 
large trades can have on the market. Indeed, disclosure of these 
large orders can reduce the likelihood of their being filled.'' See 
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 
10577, 10581 (February 28, 2000) (SR-NYSE-99-48) (emphasis added).
    \10\ For example, IEX Services LLC (``IEX'') is an alternative 
trading venue, regulated by the SEC pursuant to Regulation ATS. 17 
CFR 242.300-303. IEX describes itself as ``Dedicated to 
institutionalizing fairness in the markets. . . .'' (See http://www.iextrading.com/about/). IEX provides a Minimum Quantity order 
parameter (``MQTY''), which allows a subscriber to designate a 
minimum indicated share size that must be satisfied for the order to 
be executed. See http://www.iextrading.com/services/. There are two 
methods that IEX will apply to determine the satisfaction of MQTY 
condition of orders. Under ``Method 2,'' an MQTY order may 
have a Minimum Execution size, which provides execution of the order 
if the resting order with the highest priority which would trade 
with the active order would trade shares equal to or greater than 
the minimum quantity defined on the active order. This is precisely 
the functionality the Exchange is proposing. The Exchange notes that 
the BIDS Alternative Trading System also has functionality that 
allows its subscribers to select a minimum size requirement, which 
prevents a subscriber's interest from interacting with contra-side 
interest if its size is less than the specified minimum. See http://www.bidstrading.com/solutions/faqs/.
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    Accordingly, to attract larger Minimum Quantity Orders to the 
Exchange NASDAQ is proposing new optional functionality that will allow 
a market participant to designate a minimum individual execution size, 
and thus allow users to avoid interaction with such smaller orders 
resting on the book. As discussed above, under the current rule a 
Minimum Quantity Order will execute against any number of smaller 
contra-side orders that, in aggregate, meet the minimum quantity set by 
the market participant. For example, if a market participant entered a 
Minimum Quantity Order to buy with a price of $10, a size of 1,000 and 
a minimum quantity of 500, and the order was marketable against two 
resting sell orders for 300 and 400 shares, the System would aggregate 
both orders for purposes of meeting the minimum quantity, thus 
resulting in executions of 300 shares and 400 shares respectively with 
the remaining 300 shares of the Minimum Quantity Order posting to the 
book with a minimum quantity restriction of 300 shares. The proposed 
new optional functionality will not allow aggregation of smaller 
executions to satisfy the minimum quantity of a Minimum Quantity Order. 
Using the same scenario as above, but with the proposed new 
functionality and a minimum execution size requirement of 400 shares 
selected by the market participant, the Minimum Quantity Order would 
not execute against the two sell orders because the order at the top of 
the NASDAQ order book is less than 400 shares. The new functionality 
will reprice the Minimum Quantity Order to the next best price and post 
the order to the NASDAQ order book as a Non-Displayed Order when the 
top of the NASDAQ order book is of insufficient size to satisfy the 
minimum execution size requirement. Applied to the example above, the 
order would post to the NASDAQ order book as a Non-Displayed Order to 
buy 1,000 shares at $9.99. NASDAQ notes that the market participant 
entering the Minimum Quantity Order has expressed its intention not to 
execute against liquidity below a certain minimum size, and therefore 
cedes execution priority when it would lock resting orders

[[Page 60209]]

against which it would otherwise execute if it were not for the minimum 
execution size restriction.
    NASDAQ believes that it is appropriate to adjust the price to the 
next best price prior to posting on the NASDAQ order book because, by 
using the minimum execution size option, the submitter of the order is 
choosing to reduce the number of situations in which the order could 
potentially execute. Thus an order without this further restriction 
provides greater contribution to the price discovery process of the 
market. All bona fide market participation that results in an execution 
on a data feed contributes to the price discovery process that is 
essential to a proper functioning market. However, there are different 
degrees to which activity within the market contributes to price 
discovery. A displayed order at the NBBO of an Exchange, and the 
subsequent execution thereof, contributes significantly to price 
discovery because both the displayed order prior to execution, and the 
execution itself, provide a reference price to the market. Further, a 
non-displayed order on an exchange contributes to price discovery as it 
is part of the continuous auction on a market with publicly displayed 
orders and quotes--albeit the contribution of a non-displayed order on 
an exchange is less than the contribution of a displayed order on the 
exchange. Furthermore, a non-displayed order on a dark pool contributes 
less to price discovery because it is resting in a less transparent 
trading venue that is not part of the continuous auction of a lit 
exchange. If one were to rank the contribution to price discovery that 
different market activity provides, it would include the following 
(listed from least price discovery contribution to most):
     Order resting in dark pool (no contribution)
     Non-Displayed order on exchange (no or very little 
contribution)
     Order execution in dark pool (some contribution, execution 
reported publicly via TRF)
     Non-Displayed order execution on Exchange (contribution as 
part of continuous auction, execution reported publicly, and priority 
is behind displayed--i.e., priority is ceded to orders that contribute 
more to price discovery)
     Displayed order on exchange (significant contribution)
     Displayed order execution on exchange (significant 
contribution, publicly displayed order plus execution reported 
publicly)

In this sense the proposed change continues to contribute more 
meaningfully to price discovery than an order in a dark pool because it 
is part of the continuous auction market on NASDAQ \11\ but, similar to 
a regular non-displayed order ceding priority to displayed orders on 
the Exchange, the enhanced MAQ order will cede price priority to orders 
that do not contain the minimum execution size restriction. Also unlike 
the current process, the proposed new functionality will cancel the 
remainder of a marketable Minimum Quantity Order that is partially 
filled upon entry if the partially executed Minimum Quantity Order 
would lock resting contra-side liquidity that does not meet the minimum 
execution size requirement. Under the current process, a Minimum 
Quantity Order that receives a partial execution has the remainder of 
the order posted to the NASDAQ order book as a Non-Displayed Order. The 
proposed new functionality will, instead, cancel any shares not 
executed after a partial execution of a Minimum Quantity Order if there 
are more shares that remain resting on the book at a price that would 
satisfy the limit price of the Minimum Quantity Order but that are not 
executable against the incoming Minimum Quantity Order due to the 
minimum execution size set on the order. For example, a Minimum 
Quantity Order to buy priced at $10 with a size of 1,000 and a minimum 
quantity of 500, that is marketable against two sell orders on the 
NASDAQ order book, one for 500 shares and one for 400 shares, would 
result in the execution of 500 shares and the cancellation of the 
remaining 500 shares. Under the current process, the order would 
receive two partial executions of 500 and 400 shares, and the remaining 
100 shares would be posted to the NASDAQ order book as a Non-Displayed 
Order to buy priced at $10.
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    \11\ It is worth noting that NASDAQ has the single biggest pool 
of liquidity among individual exchanges. For example, in July The 
NASDAQ Stock Market accounted for 16.3% of consolidated NMS security 
volume. The next biggest single pool of liquidity was NYSE with 
11.2%. See http://www.NASDAQTrader.com historical volume for more 
information.
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    NASDAQ notes that when a non-IOC Minimum Quantity Order is 
partially executed and cancelled in this situation, the contra-side 
liquidity that is not executed may be Non-Displayed. If a Minimum 
Quantity Order is cancelled due to Non-Displayed contra-side liquidity, 
the submitter of the order will know that there may be a resting order 
or orders at the price of the Minimum Quantity Order and also that the 
resting order or orders are for fewer shares than the minimum execution 
size required by the order. NASDAQ believes this is acceptable because 
the Minimum Quantity Order has already partially executed for a size of 
at least one round lot and thus the order submitter has taken on risk 
due to the execution and therefore contributed to price discovery in 
the market place. Furthermore, this is not unlike the information that 
is obtained when a Post-Only Order \12\ is repriced due to resting Non-
Displayed contra-side liquidity. In fact, this Minimum Quantity Order 
scenario is more beneficial to the market as it results in an execution 
which provides a greater contribution to price discovery.
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    \12\ Rule 4751(f)(10).
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    Under the proposed change, a resting MAQ order will operate the 
same way as it does currently. When an order with a minimum quantity is 
posted on the book, it will only execute against incoming orders if the 
individual incoming order is equal to or greater than the minimum 
designated on the order. The primary difference between the current 
functionality and the proposed new functionality is that upon receipt, 
an incoming order with a minimum quantity designation will only execute 
against individual resting orders if the order at the top of the book 
meets or exceeds the minimum on the order. The Exchange believes that 
this is no different than a recently-adopted change to the NYSE Arca 
MPL-IOC order type,\13\ which allows ETP holders to designate a minimum 
execution size when checking the book for liquidity and does not allow 
an execution unless it is against an order that is equal to or greater 
than the minimum designated on the order.
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    \13\ See NYSE Arca Rule 7.31(h)(6); see also Securities Exchange 
Act Release No. 71366 (January 22, 2014), 79 FR 4515 (January 28, 
2014) (SR-NYSEArca-2014-01).
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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,\14\ in general, and with 
Section 6(b)(5) of the Act,\15\ 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

[[Page 60210]]

public interest. Specifically, the proposed change to the functioning 
of the Minimum Quantity Order will provide market participants, 
including institutional firms who ultimately represent individual 
retail investors in many cases, with better control over their orders, 
thereby providing them with greater potential to improve the quality of 
their order executions. Currently, the rule allows the market 
participant to designate a minimum acceptable quantity on an order 
that, upon entry, may aggregate multiple executions to meet the minimum 
quantity requirement. Once posted to the book, however, the minimum 
quantity requirement is equivalent to a minimum execution size 
requirement. The Exchange is now proposing to provide a market 
participant with control over the execution of their Minimum Quantity 
Order by allowing them an option to designate the minimum individual 
execution size upon entry. The control offered by the proposed change 
is consistent with the various types of control currently provided by 
exchange order types. For example, NASDAQ and other exchanges offer 
limit orders, which allow a market participant control over the price 
it will pay or receive for a stock.\16\ Similarly, exchanges offer 
order types that allow market participants to structure their trading 
activity in a manner that is more likely to avoid certain transaction 
cost related economic outcomes.\17\ Moreover and as discussed above, 
other trading venues provide the very functionality that the Exchange 
is proposing.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See, e.g., Rule 4751(f)(3).
    \17\ For example, NASDAQ's Post-Only Order. See Rule 
4751(f)(10).
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    As discussed above, some market participants have requested the 
functionality proposed herein so they may avoid transacting with 
smaller orders that they believe ultimately increases the cost of the 
transaction. Market participants such as large institutions that 
transact a large number of orders on behalf of retail investors have 
noted that, because NASDAQ does not have this functionality, they avoid 
sending large orders to NASDAQ to avoid potentially more expensive 
transactions.\18\ In this regard, NASDAQ notes that the proposed new 
optional functionality may improve the NASDAQ market by attracting more 
order flow, which is currently trading on less transparent venues that 
contribute less to price discovery and price competition than 
executions and quotes that occur on lit exchanges. Such new order flow 
will further enhance the depth and liquidity on the Exchange, which 
supports just and equitable principals of trade. Furthermore, the 
proposed modification to the Minimum Quantity Order is consistent with 
providing market participants with greater control over the nature of 
their executions so that they may achieve their trading goals and 
improve the quality of their executions.
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    \18\ As noted, the proposal is designed to attract liquidity to 
the Exchange by allowing market participants to designate a minimum 
size of contra-side order to interact with, thus providing them with 
functionality available to them on dark markets. The designation of 
a minimum size may reduce the interaction that such new order flow 
would have with smaller contra-side orders on the Exchange, some of 
which may be retail order flow. The Exchange notes that, since the 
order flow attracted by this functionality may also represent retail 
investors and is in addition to the existing order flow currently on 
the Exchange, market quality for retail investors should not be 
negatively impacted ultimately. Accordingly, the Exchange does not 
believe that retail orders will be disadvantaged by the proposed 
change.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. 
Specifically, the proposed change allows market participants to 
condition the processing of their orders based on a minimum execution 
size. The changes to the Minimum Quantity Order will enhance the 
functionality offered by NASDAQ to its members, thereby promoting its 
competitiveness with other exchanges and non-exchange trading venues 
that plan to, or already, offer similar functionality. As a 
consequence, the proposed change will promote competition among 
exchanges and their peers, which, in turn, will decrease the burden on 
competition rather than place an unnecessary burden thereon.

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
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-095 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-095. 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 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-2014-095 and should 
be submitted on or before October 27, 2014.


[[Page 60211]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-23703 Filed 10-3-14; 8:45 am]
BILLING CODE 8011-01-P


