
[Federal Register Volume 80, Number 16 (Monday, January 26, 2015)]
[Notices]
[Pages 4008-4011]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01249]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74096; File No. SR-NASDAQ-2014-116]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change Relating to the NASDAQ Opening and 
Halt Cross

January 20, 2015.

I. Introduction

    On November 21, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or 
the ``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 relating to its process for opening trading on 
Nasdaq Options Market, LLC (``NOM'') at the beginning of the trading 
day and following a trading halt. The proposed rule change was 
published for comment in the Federal Register on December 10, 2014.\3\ 
The Commission received no comments on 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. 73739 (November 12, 
2014), 79 FR 73382 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to modify its process for opening option 
trading on NOM at the beginning of the trading day and following a 
trading halt. The Exchange proposes to accomplish this by revising 
definitional terms set forth in Chapter VI, Sections 1 and 8(a) of its 
rules, and by revising the description of the processing of the Nasdaq 
Opening Cross \4\ set forth in Chapter VI, Section 8(b) of its rules. 
The Exchange also proposes to revise the language set forth in Chapter 
VI, Section 8(c) describing what occurs in the absence of an opening 
cross.\5\
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    \4\ The term ``Nasdaq Opening Cross'' is defined in Chapter VI, 
Section 8(a)(3) of the Exchange's rules. As is discussed infra, this 
definition is among those that the Exchange has proposed to revise.
    \5\ Unless otherwise noted, all citations herein to Sections of 
the Exchange's rules are citations to Sections of Chapter VI of its 
rules.
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Definitions--Sections 1 and 8(a)

    The Exchange proposes to add an ``On the Open Order'' or ``OPG'' as 
a new order type and time-in-force condition defined in Section 1. As 
proposed, any order designated as such would be executable only during 
the Nasdaq Opening Cross, with any portion not so executed cancelled 
back to the entering participant.\6\
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    \6\ See proposed Sections 1(e)(7) and 1(g)(1).
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    In addition, the Exchange proposes to make the following 
definitional changes to Section 8(a):
     ``Order Imbalance Indicator'' is currently defined as a 
message disseminated by electronic means containing information about 
``Eligible Interest'' \7\ and the price in penny increments at which 
such interest would execute at the time of dissemination.\8\ The 
``Current Reference Price'' is one piece of information disseminated as 
part of the Order Imbalance Indicator and, as currently defined, is 
determined based on three price parameters.\9\ The Exchange proposes to 
delete these price parameters and to simplify the definition of 
``Current Reference Price'' to be: An indication of what the opening 
cross would be at a particular point in time.\10\ Additionally, the 
indicative prices at which the Nasdaq Opening

[[Page 4009]]

Cross would occur, which are also currently disseminated as part of the 
Order Imbalance Indicator,\11\ would be eliminated from such 
dissemination as part of the proposal.\12\
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    \7\ The term ``Eligible Interest'' is defined in Section 8(a)(4) 
and, as discussed below, is a term that the Exchange proposes to 
modify.
    \8\ See Section 8(a)(2). The Exchange proposes to provide itself 
with the ability to disseminate the Order Imbalance Indicator more 
frequently than the five second intervals currently required. See 
proposed Section 8(b)(3). The Exchange also proposes to specify that 
the dissemination interval, in addition to the start of 
dissemination, would be posted on its Web site. Id.
    \9\ See Section 8(a)(2)(A).
    \10\ See proposed Section 8(a)(2)(A). The Exchange states that 
the revised definition of Current Reference Price would be 
substantively similar to the current definition, but with the 
opening cross price determined pursuant to Section 8(b). See Notice, 
79 FR at 73383.
    \11\ See Section 8(a)(2)(E).
    \12\ See proposed Section 8(a)(2), from which current Section 
8(a)(2)(E) would be deleted.
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     The Exchange proposes to revise the term ``Nasdaq Opening 
Cross'' to mean the process for opening or resuming trading pursuant to 
Section 8, which includes the process for determining the price at 
which Eligible Interest shall be executed at the opening of trading for 
the day or the opening of trading for a halted option, and the process 
for executing such Eligible Interest.\13\
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    \13\ See proposed Section 8(a)(3).
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     The Exchange would revise the term ``Eligible Interest'' 
to mean any quotation or any order that may be entered into the system 
and designated with a time-in-force of IOC (immediate-or-cancel), DAY 
(day order), GTC (good-till-cancelled), and OPG (On the Open 
Order).\14\ The Exchange would also revise the definition of this term 
to specify that orders received via FIX protocol prior to the Nasdaq 
Opening Cross designated with a time-in-force of IOC would be rejected 
and shall not be considered Eligible Interest, and orders received via 
OTTO and SQF protocols prior to the Nasdaq Opening Cross designated 
with a time-in-force of IOC would remain in force through the opening 
but be cancelled immediately after the opening.\15\ The Exchange notes 
that FIX protocol users generally prefer a cancellation if an order is 
not executed immediately so that they can have an opportunity to access 
other markets, while OTTO and SQF protocol users are liquidity 
providers who prefer that their orders live throughout the entire 
opening process until it is clear that their liquidity was not utilized 
in the opening.\16\
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    \14\ See proposed Section 8(a)(4).
    \15\ Id.
    \16\ See Notice, 79 FR at 73383.
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     The Exchange also proposes to add new terms ``Valid Width 
National Best Bid or Offer'' (or ``Valid Width NBBO'') and ``Away Best 
Bid or Offer'' (or ``ABBO'') to Section 8(a). Specifically, in new 
Section 8(a)(6), the Exchange proposes to define ``Valid Width NBBO'' 
as the combination of all away market quotes and any combination of 
NOM-registered Market Maker (``Market Maker'') orders and quotes 
received over the OTTO or SQF protocols within a specified bid/ask 
differential as established and published by the Exchange. The Valid 
Width NBBO would be configurable by underlying, and a table with valid 
width differentials would be posted by Nasdaq on its Web site.\17\ Away 
markets that are crossed (i.e., an away market is internally crossed or 
crosses another away market) would void all Valid Width NBBO 
calculations.\18\ If any Market Maker orders or quotes on NOM are 
crossed internally, then all such orders and quotes would be excluded 
from the Valid Width NBBO calculation.\19\ In addition, in new Section 
8(a)(7), the Exchange proposes to define ``ABBO'' as the displayed 
National Best Bid or Offer not including the Exchange's Best Bid or 
Offer. The Exchange states that it is proposing to add these new terms 
in order to ensure that all away market quotes and any combination of 
Market Maker orders and quotes, whether they include the Exchange's 
Best Bid or Offer or not, are represented in the opening cross.\20\
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    \17\ See proposed Section 8(a)(6).
    \18\ Id.; see also Notice, 79 FR at 73384.
    \19\ See proposed Section 8(a)(6).
    \20\ See Notice, 79 FR at 73384. The Exchange also notes that, 
with respect to the Valid Width NBBO, the orders and quotes on the 
Exchange would be received over the OTTO or SQF protocols. Id.
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Processing of Nasdaq Opening Cross--Section 8(b)

    The Exchange proposes various revisions to the Nasdaq Opening Cross 
process set forth in Section 8(b). As an initial matter, the Exchange 
proposes to edit the introductory paragraph of Section 8(b) by: 
Deleting the phrase ``there is no Imbalance'' so that the rule applies 
more generally; deleting the phrase ``on a class-by-class basis'' in 
order to clarify that the Exchange will use a regular market hours 
quote or trade (as determined by the Exchange) for all classes on the 
Exchange for the Opening Cross without distinguishing among different 
classes; and adding the phrase ``the Opening Process shall occur'' in 
order to clarify that an Opening Cross shall occur after a trading halt 
when trading resumes pursuant to Chapter V, Section 4.\21\
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    \21\ See proposed Section 8(b); see also Notice, 79 FR at 73384. 
Chapter V, Section 4 states that trading in an option that has been 
the subject of a halt under Section 3 of Chapter V 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. According to the Exchange, trading shall resume according 
to the process set forth in proposed Section 8(b). See Notice, 79 FR 
at 73383.
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    Following the introductory paragraph, the Exchange proposes to set 
forth the criteria that must be present for NOM to open trading at the 
beginning of the day or after a halt, provided the ABBO is not 
crossed.\22\ Specifically, the rule would state that, if a trade is 
possible on NOM, there must be a Valid Width NBBO before trading will 
open; \23\ and if no trade is possible on NOM, then trading would open 
upon the occurrence of any one of the following three criteria: (A) A 
Valid Width NBBO is present, (B) a certain number of other options 
exchanges (as determined by the Exchange) have disseminated a firm 
quote on OPRA, or (C) a certain period of time (as determined by the 
Exchange) has elapsed.\24\
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    \22\ See proposed Section 8(b).
    \23\ See proposed Section 8(b)(1).
    \24\ See proposed Section 8(b)(2). In the case of a crossed 
ABBO, the Exchange notes that the conditions set forth in proposed 
Sections 8(b)(1) and (b)(2) would become operative when the ABBO 
becomes uncrossed. See Notice, 79 FR at 73384 n.18. Additionally, 
the Exchange notes that, due to its proposed addition of new 
Sections 8(b)(1) and (b)(2), it has proposed to renumber current 
Sections 8(b)(1) through 8(b)(5) to 8(b)(3) through 8(b)(7), 
respectively. See Notice, 79 FR at 73386.
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    In addition, the Exchange proposes to add language in proposed 
Section 8(b)(4)(A)-(C) to specify how the Opening Cross price would be 
determined when a trade is possible on NOM and a Valid Width NBBO is 
present. Proposed Section 8(b)(4)(A) would state that the Nasdaq 
Opening Cross shall occur at the price that maximizes the number of 
contracts of Eligible Interest in NOM to be executed at or within the 
ABBO and within a defined range, as established and published by the 
Exchange, of the Valid Width NBBO.\25\ Proposed Section 8(b)(4)(B) 
would state that if more than one price exists under subparagraph (A) 
and there are no contracts that would remain unexecuted in the cross, 
the Nasdaq Opening Cross shall occur at the midpoint price, rounded to 
the penny closest to the price of the last execution in that series 
(and in the absence of a previous execution price, the price will round 
up, if necessary),\26\ of (1) the National Best Bid or the last offer 
on NOM against which contracts would be traded, whichever is higher; 
and (2) the National Best Offer or the last bid on NOM against which 
contracts would be traded, whichever is lower.\27\ Proposed Section 
8(b)(4)(C) would state if more than one price exists under

[[Page 4010]]

subparagraph (A) and contracts would remain unexecuted in the cross, 
then the opening price would be the highest (lowest) price in the case 
of a buy (sell) imbalance at which the maximum number of contracts can 
trade which is equal to or within a defined range, as established and 
published by the Exchange,\28\ of the Valid Width NBBO on the contra 
side of the imbalance that would not trade through the ABBO.\29\
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    \25\ See proposed Section 8(b)(4)(A).
    \26\ The Exchange notes that rounding would be applied, if 
needed, in the following manner: If the previous closing price is 
less than the midpoint, then the opening price rounds down; and if 
the previous closing price is greater than the midpoint, or if there 
is no closing price, then the opening price rounds up. For example, 
if there is a midpoint of 1.045, the opening price would be rounded 
to 1.04 if the previous closing price was 1.00, and would be rounded 
to 1.05 if the previous closing price was 1.10. See Notice, 79 FR at 
73385 n.22.
    \27\ See proposed Section 8(b)(4)(B).
    \28\ The Exchange notes that, pursuant to Section 10(7), the 
system will also calculate a defined range to limit the range of 
prices at which an order would be allowed to execute. See Notice, 79 
FR at 73385 n.23.
    \29\ See proposed Section 8(b)(4)(C).
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    Further, the Exchange proposes to add subsections to proposed 
Section 8(b)(4)(C) in order to specify the price at which unexecuted 
contracts would be posted on the book following the Opening Cross and 
the subsequent handling of the residual unexecuted contracts.\30\ These 
subsections would provide as follows: (i) If unexecuted contracts 
remain with a limit price that is equal to the opening price, then the 
remaining unexecuted contracts would be posted at the opening price, 
displayed one minimum price variation (MPV) away if displaying at the 
opening price would lock or cross the ABBO, with the contra-side NOM 
BBO reflected as firm; (ii) if unexecuted contracts remain with a limit 
price that is through the opening price, and there is a contra side 
ABBO at the opening price, then the remaining unexecuted contracts 
would be posted at the opening price, displayed one minimum price 
variation (MPV) away from the ABBO, with the contra side NOM BBO 
reflected as firm, and order handling of any remaining interest would 
be done in accordance with the routing and time-in-force instructions 
of such interest and would follow the Acceptable Trade Range mechanism 
set forth in Section 10; (iii) if unexecuted contracts remain with a 
limit price that is through the opening price, and there is no contra 
side ABBO at the opening price, then the remaining contracts would be 
posted at the opening price, with the contra-side NOM BBO reflected as 
non-firm; and (iv) order handling of any residual unexecuted contracts 
would be done in accordance with Section 10(7), with the opening price 
representing the reference price.\31\
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    \30\ See proposed Section 8(b)(4)(C)(i)-(iv).
    \31\ Id.
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    This proposed handling of unexecuted contracts set forth in 
subsections (i)-(iv) of proposed Section 8(b)(4)(C) is intended to 
ensure that residual unexecuted contracts from the Opening Cross, 
regardless of their limit prices, are posted on the book at the opening 
price before subsequently being routed pursuant to Section 11 or walked 
to the next potential execution price(s) under the Acceptable Trade 
Range set forth in Section 10(7) (with the opening price representing 
the ``reference price'' of that rule).\32\ Moreover, the ``firm'' 
versus ``non-firm'' tagging of contra-side interest when residual 
Opening Cross interest is posted follows the construct currently in 
place on the Exchange when aggressive interest is received and triggers 
an Acceptable Trade Range (ATR) process.\33\ Contra-side NOM BBO 
interest is reflected as non-firm when the Exchange has interest with a 
limit price (or market order) that is more aggressive than the Opening 
Cross price in order to ensure that aggressively priced residual 
interest maintains priority should other aggressively priced interest 
be entered before the residual interest is permitted to access the next 
allowable range of prices.\34\
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    \32\ See Notice, 79 FR at 73386.
    \33\ Id.
    \34\ Id.
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    The Exchange is also proposing to add new text to proposed Section 
8(b)(5) to indicate that if the Nasdaq Opening Cross price is selected 
and fewer than all contracts of Eligible Interest that are available in 
NOM would be executed, all Eligible Interest shall be executed at the 
Nasdaq Opening Cross price in accordance with the execution algorithm 
assigned to the associated underlying option.\35\
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    \35\ See proposed Section 8(b)(5).
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Absence of Opening Cross--Section 8(c)

    Lastly, the Exchange proposes to add a new Section 8(c) providing 
for the return of orders in un-opened symbols in the absence of an 
Opening Cross. Proposed new Section 8(c) would be substituted for 
current Section 8(c) and would provide that if an Opening Cross in a 
symbol is not initiated before the conclusion of the Opening Order 
Cancel Timer, a firm may elect to have orders returned by providing 
written notification to the Exchange.\36\ These orders include all non 
GTC orders received over the FIX protocol.\37\ The Opening Order Cancel 
Timer represents a period of time since the underlying market has 
opened, and shall be established and disseminated by Nasdaq on its Web 
site.\38\
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    \36\ See proposed Section 8(c).
    \37\ Id.
    \38\ 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.\39\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\40\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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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    \39\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \40\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal is consistent with Section 
6(b)(5) of the Act because it will enhance and clarify the opening 
cross process, minimize or negate unnecessary complexity, and encourage 
liquidity when trading opens. The Exchange notes that it proposes to 
set forth in Section 8(b) clear language describing under what 
circumstances an opening cross will occur, and how the opening cross 
will occur if more than one possible cross price exists. In addition, 
according to the Exchange, the proposed rule change will enhance the 
price discovery mechanism in the opening process by including not only 
Market Maker orders and quotes but also away market interest as 
represented by quotes. The Exchange believes this change will make the 
transition from the opening cross period to regular market trading more 
efficient and thus promote just and equitable principles of trade and 
serve to protect investors and the public interest. The Exchange also 
believes that the proposal will significantly improve the quality of 
execution of NOM's opening, which should attract new order flow. In the 
Exchange's view, the proposed rule changes should prove helpful to 
market participants, particularly those that are involved in adding 
liquidity during the opening cross.
    The Commission believes that the proposal is reasonably 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 to protect investors and the public interest by 
adding clarity to the Exchange's rules governing NOM's opening cross 
process. This enhanced transparency should help to reduce the

[[Page 4011]]

potential for investor confusion as to when an opening cross occurs, 
how the price for the opening cross is determined, and how orders 
involved in the opening cross are handled. The Commission also believes 
that the proposed opening cross process is reasonably designed to open 
trading in a fair and orderly manner, which is consistent with the 
protection of investors and the public interest. Additionally, to 
extent the proposal results in additional liquidity during NOM's 
opening at the beginning of the trading day or following a trading 
halt, and a more orderly transition to regular trading, it should 
further promote the goals of Section 6(b)(5) of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\41\ that the proposed rule change (SR-NASDAQ-2014-116) be, and it 
hereby is, approved.
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    \41\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-01249 Filed 1-23-15; 8:45 am]
BILLING CODE 8011-01-P


