
[Federal Register Volume 81, Number 6 (Monday, January 11, 2016)]
[Notices]
[Pages 1240-1244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-249]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76833; File No. SR-NASDAQ-2015-159]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Implement Additional Price 
Protections in the Opening Process

January 5, 2016.
    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 December 23, 2015, 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 and II, 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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[[Page 1241]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to add new paragraph (F) to Rule 4752(d)(2), 
concerning the opening process.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, 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, the Exchange 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. The Exchange 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 purpose of this filing is to enhance the price protections 
provided by Rule 4752(d) in the operation of Nasdaq Opening Cross, 
Nasdaq's process for opening the market for trading System securities.
Background
    Rule 4752 concerns Nasdaq's opening process and paragraph (d) of 
the rule sets forth the processing of the Opening Cross. Specifically, 
the rule provides that the Opening Cross is initiated at 9:30 a.m. ET, 
at which time the System attempts to open a security at the price that 
maximizes the number of shares of MOO,\3\ LOO,\4\ OIO,\5\ Early Market 
Hours orders,\6\ and executable quotes and orders to be executed in the 
Nasdaq Market Center.\7\ If the System determines that more than one 
price exists that would maximize such quotes and orders to be executed, 
the Opening Cross will occur at the price that minimizes any 
Imbalance.\8\ If the System determines that more than one price exists 
that would minimize an Imbalance, the Opening Cross will occur at the 
entered price at which shares will remain unexecuted in the cross.\9\ 
If the System determines that more than one price exists whereby shares 
will remain unexecuted in the cross, the Opening Cross will occur at 
the price that minimizes the distance from the bid-ask midpoint of the 
inside quotation prevailing at 9:30 a.m.\10\
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    \3\ A ``Market On Open'' or ``MOO'' order is an Order Type 
entered without a price that may be executed only during the Nasdaq 
Opening Cross. Generally, MOO Orders may be entered, cancelled, and/
or modified between 4 a.m. ET and immediately prior to 9:28 a.m. ET. 
An MOO Order may not be cancelled or modified at or after 9:28 a.m. 
ET. An MOO Order shall execute only at the price determined by the 
Nasdaq Opening Cross. See Rule 4702(b)(8).
    \4\ A ``Limit On Open Order'' or ``LOO Order'' is an Order Type 
entered with a price that may be executed only in the Nasdaq Opening 
Cross, and only if the price determined by the Nasdaq Opening Cross 
is equal to or better than the price at which the LOO Order was 
entered. Subject to the qualifications provided below [sic], LOO 
Orders may be entered, cancelled, and/or modified between 4 a.m. ET 
and immediately prior to 9:28 a.m. ET. See Rule 4702(b)(9).
    \5\ An ``Opening Imbalance Only Order'' or ``OIO Order'' is an 
Order Type entered with a price that may be executed only in the 
Nasdaq Opening Cross and only against MOO Orders, LOO Orders, or 
Early Market Hours Orders (as defined in Rule 4752). OIO Orders may 
be entered between 4:00 a.m. ET until the time of execution of the 
Nasdaq Opening Cross, but may not be cancelled or modified at or 
after 9:28 a.m. ET. If the entered price of an OIO Order to buy 
(sell) is higher than (lower than) the highest bid (lowest offer) on 
the Nasdaq Book, the price of the OIO Order will be modified 
repeatedly to equal the highest bid (lowest offer) on the Nasdaq 
Book; provided, however, that the price of the Order will not be 
moved beyond its stated limit price. See Rule 4702(b)(10).
    \6\ An Early Market Hours Order is a Market Hours Order that is 
entered into the system prior to 9:28 a.m. and which is treated as 
an Opening Imbalance Only order [sic], as appropriate, for the 
purposes of the Nasdaq Opening Cross. A Market Hours Order is any 
order that may be entered into the system and designated with a 
time-in-force of MIOC, MDAY, MGTC. See Rule 4752(a)(7). See also 
Rules 4703(a) for a discussion of the Time in Force Order attribute, 
including MIOC, MDAY, and MGTC.
    \7\ See Rule 4752(d)(2)(A).
    \8\ See Rule 4752(d)(2)(B).
    \9\ See Rule 4752(d)(2)(C).
    \10\ See Rule 4752(d)(2)(D).
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    When the Opening Cross price is calculated, Nasdaq applies a 
boundary within which the cross must execute to ensure that the price 
derived does not exceed a price reasonably tied to the prevailing 
market at the time. Specifically, Nasdaq applies a percentage based 
threshold (``Threshold Percentage'') to a benchmark (``Benchmark 
Value'') that, when applied to an individual security, determines the 
price range that a security may cross (``Threshold Range''), outside of 
which the opening price of a security may not occur.\11\ If an Opening 
Cross price of a security would otherwise be outside of the Threshold 
Range, Nasdaq will adjust the Opening Cross price of the security to a 
price within the Threshold Range that best satisfies the normal process 
for determining the Opening Cross price.\12\ This change happens 
automatically prior to execution of the Opening Cross, and does not 
involve any human intervention. All unexecuted shares designated to 
expire upon the conclusion of the Opening Cross,\13\ including those 
that fall outside of the Threshold Range, are cancelled.
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    \11\ See Rule 4752(d)(2)(E).
    \12\ See Rules 4752(d)(2)(A)-(D).
    \13\ These are: MOO, LOO, OIO, and Early Market Hours Orders 
designated to participate in the Opening Cross. Prior to the Opening 
Cross, the Exchange maintains a continuous order book and an Opening 
Cross order book. Orders in the Opening Cross order book may execute 
only in the Opening Cross process, while Orders in the continuous 
book may execute during pre-market hours trading, in the Opening 
Cross, or in regular market hours trading if the Order has a time-
in-force that will allow it to remain active.
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    The Threshold Percentage and Benchmark Value are set by Nasdaq 
officials in advance and communicated to Participants.\14\ Nasdaq may 
adjust the Threshold Percentage based on Nasdaq's experience with the 
Opening Cross and on unusual market conditions, such as certain options 
and derivatives expiration days that are heavily affected by the 
opening price of Nasdaq securities. Nasdaq publishes the Benchmark 
Value and Threshold Percentages via its public NasdaqTrader Web site, 
and sets the Threshold Percentage so that repricing of a security is 
rare.\15\ Currently, Nasdaq applies a Threshold Percentage of 10%, 
which is applied to the Nasdaq Best Bid and Offer (``QBBO'') midpoint 
and is added to the Nasdaq Offer and subtracted from the Nasdaq Bid to 
establish the threshold price range. For example, if the QBBO is $10.00 
x $11.00, then the midpoint equals 10.50 and the Threshold Percentage 
is 10%, resulting in a threshold value of $1.05 (10% of $10.50 = 
$1.05). This value is then added to the offer and subtracted from the 
bid to obtain the cross's threshold range. In this example, it would 
result

[[Page 1242]]

in a lower threshold of $8.95 ($10.00 - $1.05 = $8.95) and an upper 
threshold of $12.05 ($11.00 + $1.05 = $12.05), thus creating a range of 
$8.95 to $12.05, within which the cross can occur. This means $8.95 is 
the lowest price at which the cross can occur and $12.05 is the highest 
price at which it can occur. The threshold range is dynamic; as the 
QBBO changes, the threshold price range changes.
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    \14\ As defined by Rule 4701(c).
    \15\ See http://www.nasdaqtrader.com/content/ProductsServices/Trading/Crosses/openclose_faqs.pdf.
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    The current price adjustment process under Rule 4752(d)(2)(E) is 
effective at ensuring the opening price of a security is within a 
certain range of the QBBO immediately prior to the initiation of the 
cross in the security; however, the current process does not prevent a 
cross from occurring at an erroneous price caused by an order or quote 
entered into the continuous pre-market trading book by a Participant in 
error that significantly skews the Opening Cross price of a security. 
This scenario could cause the QBBO to be excessively wide, with one 
side of the bid/offer significantly distant from the normal range and 
not representative of the true interest in the security. Nonetheless, 
the price adjustment process under Rule 4752(d)(2)(E) would allow the 
Opening Cross price to be set at an erroneous level because it would 
set the Benchmark Value at the midpoint between the erroneously-priced 
side of the market and the non-erroneously priced contra side. To 
illustrate, assume an extreme example as follows: if a security has a 
bid of $10 set by an Order to buy 100 shares at $10 in pre-market 
trading with no offer interest until 9:29 a.m., when a Participant 
erroneously enters an Order to sell 100 shares at $1100, under the 
current opening process the Benchmark Value of that security would be 
the midpoint price of $555, which would create a threshold range of 
$0.0001 by $1155.50.\16\ Under such extreme circumstances a mispriced 
open could occur, in which case the parties to an erroneous execution 
would have to avail themselves of the clearly erroneous trade 
nullification process of Rule 11890.\17\
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    \16\ The Exchange will not allow the lower threshold to be a 
negative amount and will set the lower range value to the lowest 
value possible, which is $0.0001.
    \17\ The terms of a transaction executed on Nasdaq are ``clearly 
erroneous'' when there is an obvious error in any term, such as 
price, number of shares or other unit of trading, or identification 
of the security. A transaction made in clearly erroneous error and 
cancelled by both parties or determined by Nasdaq to be clearly 
erroneous will be removed from the consolidated tape. See Rule 
11890(a)(1).
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New Protection
    Nasdaq is proposing an additional price protection process designed 
to avoid mispriced Opening Crosses and the use of the clearly erroneous 
post-trade nullification process. Once a security has an Opening Cross 
price set based on the process under Rule 4752(d)(2)(A)-(E), Nasdaq 
will require the security to pass at least one of three new ``tests'' 
in order for the Opening Cross to occur. If a security does not pass 
any of the three tests no Opening Cross will occur in that security, 
all Orders in the Opening Cross \18\ will be cancelled back to the 
Participants, and regular market hours trading will begin.
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    \18\ See note 13 above. Orders entered in the continuous book 
eligible to trade in the pre-market session prior to the opening of 
the security would not be cancelled but would rather continue to 
rest on the continuous book for potential participation in regular 
market hours trading.
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    The three new tests compare the Opening Cross price as calculated 
under the current rule to a reference price to ensure that the Opening 
Cross price is reasonably related to the market and not the product of 
erroneous Order entry. The reference price range is calculated under 
each test by applying a threshold set by Nasdaq officials in advance 
and communicated to Participants (``Price Test Thresholds''). The Price 
Test Thresholds, like the current Threshold Percentage, will be 
published via Nasdaq's public NasdaqTrader Web site. Nasdaq may apply 
different Price Test Thresholds to each of the Opening Cross Price 
Tests. The Price Test Threshold is applied to different measures under 
each of the new tests to calculate the range within which the Opening 
Cross price must fall to pass the test (``Price Test Threshold 
Range''). Nasdaq is initially setting each of the Price Test Thresholds 
uniformly at the greater of $0.50 or 10%; however, Nasdaq may adjust 
the Price Test Thresholds independently of one another.
    Opening Cross Price Test A requires the Opening Cross price of a 
Nasdaq listed security, other than newly-listed Exchange Traded 
Products (``ETPs''), to be within a Price Test Threshold Range 
established by adding and subtracting the Price Test Threshold from the 
security's prior day Nasdaq Official Closing Price (``NOCP''). Non-
Nasdaq listed securities must have an Opening Cross price within a 
Price Test Threshold Range established by adding and subtracting the 
Price Test Threshold from the security's prior day consolidated closing 
price. Unlike newly-listed company stocks that begin trading at some 
point after the stock market has opened, newly-listed ETPs usually 
begin trading in the premarket session prior to regular market hours 
trading on the security's initial day of trading and do not have a 
prior day's consolidated closing price. For such securities, the Price 
Test Threshold Range is established by adding and subtracting the Price 
Test Threshold from the offering price. If the Nasdaq Opening Cross 
price is higher or lower than the Price Test Threshold Range 
established under this test, or if a non-ETP Nasdaq listed security 
does not have a previous day's closing price,\19\ the security fails 
the test and Opening Cross Price Test B is performed.
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    \19\ For example, a security may not have a NOCP due to a unit 
separation.
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    Opening Cross Price Test B requires the Opening Cross price of a 
security to be within a Price Test Threshold Range established by 
adding and subtracting the Price Test Threshold from the security's 
Nasdaq last sale (either round or odd lot) occurring after 9:15 a.m. ET 
but prior to the Opening Cross. If the Opening Cross price is higher or 
lower than the Price Test Threshold Range established under this test, 
or if there is no Nasdaq last sale,\20\ the security fails the test and 
Opening Cross Price Test C is performed.
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    \20\ A security may not have a Nasdaq last sale because there 
was no trading in the security during the premarket session.
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    Opening Cross Price Test C requires the Opening Cross price to fall 
within the Price Test Threshold Range established by adding and 
subtracting the Price Test Threshold from the Nasdaq best bid (for 
Opening Cross prices that would be higher than the security's closing 
price as established in Test A) or Nasdaq best offer (for opening cross 
prices that would be lower than the security's closing price as 
established in Test A). For purposes of this test, if a security does 
not have a NOCP or consolidated closing price, as applicable, for the 
previous trading day Nasdaq will use a price of $0. If the Nasdaq 
Opening Cross price is higher or lower than the Opening Cross price 
range established under this test all Orders in the Opening Cross \21\ 
will be cancelled back to Participants, no Opening Cross will occur, 
and the security will open for regular market hours trading.
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    \21\ See note 18 above.
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    Using the example above where the QBBO is $10 x $11 and Opening 
Price Range is $8.95 to $12.05, if the Opening Cross price is 
calculated to be $10.50 then the security would move on to the Opening 
Cross eligibility test process. Under Opening Cross Price Test A, if 
the security had a NOCP of $12.50 then the Price Test Threshold used 
would be 10% (10% of $12.50 = $1.25, which is greater than $0.50) and 
the Price Test Threshold Range would be $11.25 to $13.75 ($12.50-$1.25 
= $11.25 and

[[Page 1243]]

$12.50 + $1.25 = $13.75). Because the Opening Cross price is less than 
the lower threshold ($10.50 < $11.25), the security fails Opening Cross 
Price Test A and Opening Cross Price Test B is performed.
    Under Opening Cross Price Test B, if the last sale at 9:20 a.m. is 
$11.90, the Price Test Threshold would be 10% (10% of $11.90 = $1.19, 
which is greater than $0.50) and the Price Test Threshold Range would 
be $10.71 to $13.09 ($11.90 - $1.19 = $10.71 and $11.90 + $1.19 = 
$13.09). Because the Opening Cross price is less than the lower 
threshold ($10.50 < $10.71), the security fails Opening Cross Price 
Test B and Opening Cross Price Test C is performed.
    Under Opening Cross Price Test C, since the Opening Cross price is 
lower than the NOCP ($10.50 < $12.50), the QBBO offer price of $11 
would be used to calculate the Price Test Threshold Range, which would 
result in a Price Test Threshold of 10% (10% of $11 = $1.10, which is 
greater than $0.50) and a Price Test Threshold Range of $9.90 to $12.10 
($11 - $1.10 = $9.90 and $11 + $1.10 = $12.10). Because the Opening 
Cross price is within the Price Test Threshold Range, the security 
passes the test and the Opening Cross may proceed.
    Accordingly, these new protections will mitigate situations in 
which the Opening Cross price may be erroneous. As a result, the 
changes will support fair and orderly markets.
Implementation
    Nasdaq is proposing to implement the proposed change in a measured 
approach over the course of approximately four weeks. Although Nasdaq 
does not foresee any technical issues with implementation of the 
proposed changes, they affect a fundamental process in the operation of 
an orderly market. As a result, the Exchange believes it should 
implement the changes in stages. The Exchange will use a rollout 
schedule that will start with a small number of securities (e.g., 5-50) 
with each stage increasing the number of securities to be rolled out. 
The implementation details will be published via an Exchange Trader 
Alert and be posted on the NasdaqTrader Web site. The Exchange believes 
that this measured approach will minimize risk to the overall market.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\22\ Specifically, the 
proposal is consistent with Section 6(b)(5) of the Act,\23\ because it 
would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change will promote just 
and equitable principles of trade because it will implement a process 
designed to prevent Opening Crosses to occur [sic] at erroneous prices. 
As explained, under the current process an erroneous order or quote may 
significantly skew the current Benchmark Value that is used to create a 
boundary for the Opening Cross Price. This may then lead to the Opening 
Cross price would result [sic] in a temporary price dislocation from 
normal pricing and typically the use of the clearly erroneous trade 
nullification process under Rule 11890.
    The Exchange considers that a better approach is to implement a 
system of tests, as proposed herein, that would not allow an erroneous 
order or quote affect the opening of a security. The proposed change, 
moreover, would mitigate the likelihood of an erroneous execution 
occurring in the Opening Cross, since all Orders in the Opening Cross 
would be cancelled. There would be no need then to use the clearly 
erroneous trade nullification process because no such trade would 
occur. Thus, the proposed rule change also protects investors, by 
avoiding erroneous transactions, which are disruptive to individual 
investors and the market overall.
    The proposal also promotes just and equitable principles of trade 
and further perfects mechanism of fair and orderly markets in that it 
promotes transparency and uniformity in handling erroneous trades in 
the Opening Cross.
    Finally, implementing the proposed changes in a phased approach 
promotes just and equitable principles of trade, further improves 
participating [sic] in fair and orderly markets, and serves to protect 
investors because it will limit the potential disruption to the market 
to a subset of the total number of securities in the opening cross 
should the Exchange experience a technical issue with the 
implementation.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change 
implicates any competitive issues. The proposed change implements 
changes that will benefit all market participants by avoiding Opening 
Prices that are not reasonably related to bona fide market interest. 
Avoiding such prices will ensure that the information on which market 
participants make investment decisions is accurate and representative 
of investors' interest. As such, the proposed changes should not place 
a burden on competition whatsoever.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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 No. SR-NASDAQ-2015-159 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 No. SR-NASDAQ-2015-159. 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

[[Page 1244]]

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 such 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 No. SR-NASDAQ-2015-159, and should be 
submitted on or before February 1, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-249 Filed 1-8-16; 8:45 am]
BILLING CODE 8011-01-P


