
[Federal Register Volume 80, Number 248 (Monday, December 28, 2015)]
[Notices]
[Pages 80847-80849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32527]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76718; File No. SR-NASDAQ-2015-112]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change To Amend Rule 4758

December 21, 2105.

I. Introduction

    On September 21, 2015, 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 adopt a new routing option, the Retail Order 
Process (``RTFY''). The proposed rule change was published for comment 
in the Federal Register on October 1, 2015.\3\ The Commission received 
two comment letters on the proposed rule change \4\ and a response 
letter from NASDAQ.\5\ On November 3, 2015, the Commission extended the 
time period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change, to December 
30, 2015.\6\ NASDAQ subsequently submitted a second response letter.\7\ 
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. 75987 (September 25, 
2015), 80 FR 59210 (``Notice'').
    \4\ See letter from Joseph Saluzzi, Themis Trading LLC to the 
Commission, dated September 29, 2015 (``Themis Letter''); and letter 
from Suzanne Shatto to the Commission, dated October 6, 2015 
(``Shatto Letter'').
    \5\ See letter from Jonathan F. Cayne, Senior Associate General 
Counsel, NASDAQ to Brent J. Fields, Secretary, Commission, dated 
October 22, 2015 (``NASDAQ Response'').
    \6\ See Securities Exchange Act Release No. 76335, 80 FR 69256 
(November 9, 2015).
    \7\ See letter from Jonathan F. Cayne, Senior Associate General 
Counsel, NASDAQ to Brent J. Fields, Secretary, Commission, dated 
December 11, 2015 (``NASDAQ Supplemental Response'').
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II. Description of the Proposal

    NASDAQ is proposing to amend Rule 4758 to add a new order routing 
option--RTFY--for Designated Retail Orders (``DROs'').\8\ NASDAQ states 
that retail order firms \9\ often send non-marketable order flow to 
post and display on exchanges. However, some orders that have been 
deemed to be non-marketable by the entering firm become marketable by 
the time the exchange receives them.\10\ NASDAQ notes that these orders 
ultimately remove liquidity from the NASDAQ order book even though the 
firm entering the order did not intend them to remove liquidity.\11\
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    \8\ A Designated Retail Order is an agency or riskless principal 
order that meets the criteria of FINRA Rule 5320.03 and that 
originates from a natural person and is submitted to NASDAQ by a 
member that designates it pursuant to Rule 7018, provided that no 
change is made to the terms of the order with respect to price or 
side of market and the order does not originate from a trading 
algorithm or any other computerized methodology. An order from a 
``natural person'' can include orders on behalf of accounts that are 
held in a corporate legal form--such as an Individual Retirement 
Account, Corporation, or a Limited Liability Company--that has been 
established for the benefit of an individual or group of related 
family members, provided that the order is submitted by an 
individual. Members must submit a signed written attestation, in a 
form prescribed by NASDAQ, that they have implemented policies and 
procedures that are reasonably designed to ensure that substantially 
all orders designated by the member as DROs comply with these 
requirements. Orders may be designated on an order-by-order basis, 
or by designating all orders on a particular order entry port as 
DROs. See NASDAQ Rule 7018.
    \9\ The term ``retail order firms'' refers to NASDAQ member 
firms that provide orders that qualify as Designated Retail Orders 
under NASDAQ Rule 7018.
    \10\ See Notice, 80 FR at 59210.
    \11\ See id.
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    Under the proposal, a DRO that is marketable upon receipt by NASDAQ 
and that elects to follow the RTFY routing option will be routed to 
destinations in the System routing table instead of immediately 
removing liquidity from the Exchange order book--unless explicitly 
instructed by the entering party to check the Exchange order book 
first.\12\ RTFY orders may remove liquidity from the Exchange book 
after routing to other destinations.\13\ All non-marketable RTFY orders 
will post on the Exchange book.\14\
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    \12\ See id. The term ``System routing table'' refers to the 
proprietary process for determining the specific trading venues to 
which the System routes orders and the order in which it routes 
them. NASDAQ reserves the right to maintain a different System 
routing table for different routing options and to modify the System 
routing table at any time without notice. See NASDAQ Rule 
4758(a)(1)(A).
    \13\ See Notice, 80 FR at 59210.
    \14\ If a RTFY order is posted on the Exchange, either because 
it was non-marketable when it was received or it has exhausted all 
available liquidity within its limit price--including on the 
Exchange, Regulation NMS protected quotations and other destinations 
in the System routing table--and the order is subsequently locked or 
crossed by another market center, the System will not route to the 
locking or crossing market center. See id.
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    According to NASDAQ, the destinations in the System routing table 
for RTFY will include OTC market makers,\15\ which may also be 
registered NASDAQ market makers.\16\ NASDAQ believes these market 
makers will likely provide the greatest opportunity for price 
improvement for the DROs, and the RTFY routing option will benefit DROs 
by providing additional price improvement opportunities for retail 
investors.\17\ NASDAQ anticipates that the RTFY routing option will 
route to trading centers in the System routing table that have 
experience executing and providing price improvement to DROs.\18\
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    \15\ An ``OTC market maker'' in a stock is defined in Rule 
600(b)(52) of Regulation NMS as, in general, a dealer that holds 
itself out as willing to buy and sell the stock, otherwise than on a 
national securities exchange, in amounts of less than block size 
(less than 10,000 shares).
    \16\ See Notice, 80 FR at 59210.
    \17\ See id. NASDAQ believes that, because retail orders are 
generally smaller on average, they are often able to receive better 
prices than the prevailing national best bid and offer. See id. at 
59211. NASDAQ believes that this is achieved by retail order firms 
sending their orders to OTC market makers that provide some level of 
price improvement. See id.
    \18\ See id. NASDAQ believes that approximately 96% of the DROs 
that will use the RTFY routing option will not be marketable and 
will add liquidity on the Exchange, while the remainder will be 
routed to destinations on the System routing table for potential 
price improvement, including to OTC market makers. See id.
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    As proposed, an order using the RTFY routing option will be sent to 
the primary listing exchange for opening, reopening, and closing 
auctions.\19\ Orders received in non-NASDAQ listed securities prior to 
market open that are not eligible for the pre-market session will be 
submitted to the primary listing market for inclusion in that market's 
opening process.\20\ Orders received in NASDAQ-listed securities prior 
to market open that are not eligible for the pre-market session will 
follow normal pre-market processing.\21\ Orders received prior to the 
market open that are eligible for the pre-market session will be 
posted--and routed if

[[Page 80848]]

marketable--for potential execution.\22\ Approximately two minutes 
prior to market open, active pre-market session orders in the 
Exchange's possession will be routed to the primary listing 
exchange.\23\ When a security that is listed on an exchange other than 
NASDAQ is halted, RTFY orders--including RTFY orders received during 
the halt--will be sent to the primary listing exchange for inclusion in 
that exchange's reopening process.\24\ All RTFY orders will be sent to 
the primary listing exchange approximately two minutes prior to that 
exchange's closing process.\25\
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    \19\ See id.
    \20\ See id.
    \21\ See id. and NASDAQ Rule 4752.
    \22\ See Notice, 80 FR at 59211.
    \23\ See id.
    \24\ See id.
    \25\ See id.
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    In its proposal, NASDAQ notes that the RTFY routing option is 
similar to the existing TFTY routing option.\26\ NASDAQ specifically 
notes that orders using the TFTY routing option do not check the NASDAQ 
book--unless so instructed by the entering firm--for available shares, 
and instead route to the TFTY destinations on the System routing table 
with the goal of executing with lower transaction fees.\27\ NASDAQ 
states that the RTFY routing option differs from TFTY in three ways: 
(i) RTFY is only available to DROs; (ii) RTFY uses a separate and 
distinct routing table; and (iii) RTFY orders will be sent to the 
primary listing exchange for opening, reopening, and closing 
auctions.\28\
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    \26\ See NASDAQ Rule 4758(a)(1)(A)(v). NASDAQ further notes that 
RFTY is also similar to BATS' TRIM routing option, under which an 
order checks the BATS system for available shares only if so 
instructed by the entering firm and then is sent to destinations on 
the system routing table. See Notice, 80 FR at 59211.
    \27\ See Notice, 80 FR at 59210.
    \28\ See id. at 59211.
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    NASDAQ notes that there are several alternatives to using an 
Exchange routing strategy.\29\ NASDAQ also notes that it offers 
multiple routing options, that each routing option has its own set of 
strengths and trade-offs, and that these varying routing strategies are 
designed to meet varying market participants' needs.\30\ NASDAQ 
believes the RTFY routing option will meet the needs of the retail 
order firms that opt to use it based on their routing technology, 
business model, or level of retail order flow.\31\
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    \29\ See id. For example, the Exchange notes that broker-dealers 
and vendors provide customized routing strategies and order 
execution algorithms, order flow firms may choose to make their own 
routing decisions based on proprietary routing processes, and retail 
order firms may use other firms to enhance their routing 
capabilities. See id.
    \30\ See id.
    \31\ See id.
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    NASDAQ states that the RTFY routing table will be monitored and 
approved by a best execution committee (``Committee'').\32\ NASDAQ 
states that the Committee determines how to organize the System routing 
table and which trading destinations are included in the routing table 
by reviewing various parameters, such as price improvement, fill rate, 
latency, interaction rate, experience of the execution venue operator, 
and the volume the execution venue handles on a daily basis.\33\ NASDAQ 
notes that the parameters considered by the Committee evolve over time; 
often resulting in new parameters being considered.\34\
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    \32\ See id. at 59212. The Exchange states that the Committee 
consists of several internal NASDAQ participants representing 
product management, internal audit, economic research, broker-dealer 
compliance, and market operations. See id.
    \33\ See id.
    \34\ See id.
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    NASDAQ states that neither the Exchange, nor any of its affiliates, 
will accept payment for order flow from any OTC market maker to which 
an RTFY order is sent.\35\ If the trading venue pays a standard rebate 
for DROs to all of its subscribers or another exchange pays a rebate to 
remove liquidity, NASDAQ will accept and retain those rebates.\36\ 
However, NASDAQ expects that most, if not all, orders routed using the 
RTFY routing option will be sent to and executed by an OTC market maker 
that may also be a registered NASDAQ market maker.\37\
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    \35\ See id.
    \36\ See id.
    \37\ See id.
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III. Comment Summary 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.\38\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\39\ 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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    \38\ 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).
    \39\ 15 U.S.C. 78f(b)(5).
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    The Commission received two comment letters opposing the proposal, 
as well as a response and a supplemental response from NASDAQ.\40\
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    \40\ See supra notes 4, 5, and 7.
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    The commenters express concern that RFTY is designed to allow 
leakage of order flow information.\41\ The Commission notes that, in 
response, NASDAQ states that this claim is factually incorrect and is 
speculation.\42\ NASDAQ reiterates that RTFY is designed to enhance 
execution quality and benefit retail investors by providing price 
improvement opportunities to retail order flow.\43\ According to 
NASDAQ, it will use the Committee to review and determine the structure 
and destinations of the System routing table, and if the Committee 
observes that a particular destination is not providing sufficient 
price improvement, the destination will have to improve or be dropped 
from the System routing table.\44\ NASDAQ also notes that RFTY is a 
voluntary routing type, and retail orders firms can elect not to use 
RTFY if it fails to benefit their clients.\45\ Moreover, NASDAQ notes 
that retail investors have a choice when routing their orders and it is 
up to them to determine whether they will use a broker-provided router 
or send their orders directly to a particular destination.\46\
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    \41\ See Themis Letter and Shatto Letter, supra note 4.
    \42\ See NASDAQ Response, supra note 5, at 2.
    \43\ See id.
    \44\ See id.
    \45\ See id.
    \46\ See id. at 4.
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    The commenters also express concerns related to best execution. 
Specifically, one commenter questions whether retail investors will 
forgo their marketable orders interacting with the NBBO at NASDAQ for 
``meaningless'' price improvement at OTC market makers.\47\ This 
commenter expresses concern that RTFY could result in a failure to 
obtain best execution, specifically in situations where NASDAQ was at 
the NBBO when a marketable retail order that has elected the RTFY 
routing option was received, NASDAQ routes the marketable retail order 
away but the order does not execute on the away destinations, and by 
the time the order comes back to NASDAQ, the NBBO has moved so that the 
retail order is no longer marketable and posts to the book instead of 
executing.\48\ In addition, both commenters express concerns regarding 
the transparency of the RTFY routing

[[Page 80849]]

table and the effectiveness of the Committee.\49\
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    \47\ See Themis Letter, supra note 4.
    \48\ See id.
    \49\ See Themis Letter and Shatto Letter, supra note 4.
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    In response, NASDAQ states its belief that providing additional 
price improvement opportunities for retail investors is a ``critical 
component of its best execution obligations.'' \50\ In its supplemental 
response letter, NASDAQ states that, in all routing of orders, when one 
routing destination is chosen over another, there is always a 
possibility that an execution will be missed.\51\ The Commission notes, 
however, that NASDAQ believes that any chance of an RTFY order missing 
a better price at the Exchange is ``miniscule.'' \52\ The Commission 
notes that, according to NASDAQ, some routing destinations agree to a 
guaranteed minimum price improvement per share for RTFY orders, some 
focus more on the average price improvement, and others are unsure of 
what the level of price improvement will be, but provide assurances 
that they will compete vigorously with their execution quality.\53\ 
Consequently, NASDAQ believes that the competition for RTFY orders, and 
thus the resulting execution quality, will be better than what is 
experienced today.\54\
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    \50\ See NASDAQ Response, supra note 5, at 4. Moreover, NASDAQ 
reiterates that it will not accept any negotiated payment for order 
flow. See NASDAQ Supplemental Response, supra note 7, at 1-2.
    \51\ See NASDAQ Supplemental Response, supra note 7, at 2.
    \52\ See id. at 3.
    \53\ See id. at 2.
    \54\ See id.
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    The Commission notes that, with respect to commenters' concerns 
regarding the RTFY routing table and the Committee, NASDAQ states 
that--as with all other routing options, other than Directed Orders--
the RTFY routing table will be monitored and approved by the 
Committee.\55\ According to NASDAQ, the use of a best execution 
committee is not novel, and such committees are widely-used at many 
broker-dealers.\56\ In addition, the Committee is subject to FINRA 
oversight, as well as oversight by NASDAQ Inc.'s internal audit group, 
which reports to the audit committee of the Board of Directors of 
NASDAQ Inc.\57\ According to NASDAQ, the Committee reviews the 
performance of routing destinations on a regular basis for all routing 
and the same will be true for RTFY.\58\ If the Committee determines 
that a particular routing destination is underperforming based on the 
various parameters, such as price improvement, fill rate, and latency, 
the Committee may either remove that destination altogether or lower 
its priority within the routing table.\59\ According to NASDAQ, this 
process ensures that these
    destinations will compete aggressively with each other in order to 
receive RTFY orders.\60\
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    \55\ See NASDAQ Response, supra note 5, at 3. NASDAQ notes that 
many factors are weighed when making best execution determinations, 
and that price improvement opportunities for retail investors are an 
``integral component of such decisions by both the Committee and by 
retail order firms.'' See id.
    \56\ See id.
    \57\ See id. at 3-4.
    \58\ See NASDAQ Supplemental Response, supra note 7, at 2.
    \59\ See id. NASDAQ notes that missed executions often may be 
due to latency in away destinations systems. See id. at 3. According 
to NASDAQ, because latency is one of the parameters that the 
Committee considers in its regular reviews of routing destinations, 
destinations causing undue latency that may lead to missed 
executions or inferior execution prices would lose their priority 
within the routing table or be removed altogether. See id. NASDAQ 
also notes that, if the Committee determines that a particular 
routing destination is not providing sufficient price improvement 
opportunities, then that destination will likely be removed from the 
RTFY routing table. See NASDAQ Response, supra note 5, at 4.
    \60\ See NASDAQ Supplemental Response, supra note 7, at 2. 
NASDAQ states that, in the past, the Committee has moved venues down 
within the routing table due, in part, to unsatisfactory fill rate, 
unsatisfactory price improvement, and/or unsatisfactory latency 
profile. See id.
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    Based on the foregoing, the Commission believes that the proposed 
rule change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\61\ that the proposed rule change (SR-NASDAQ-2015-112) be and 
hereby is approved.
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    \61\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-32527 Filed 12-24-15; 8:45 am]
 BILLING CODE 8011-01-P


