
[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4684-4687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76956; File No. SR-NASDAQ-2016-005]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a Limit Order 
Protection and a Market Order Protection

January 21, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 12, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq's Rule 4757, entitled ``Book 
Processing'' to adopt a Limit Order Protection or ``LOP'' and a Market 
Order Protection for members accessing the Nasdaq Market Center.
    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 Exchange proposes to adopt two new mechanisms to protect 
against erroneous orders which are entered into the Nasdaq Market 
Center. Specifically, these features address risks to market 
participants of human error in entering Orders at unintended prices. 
LOP and the Market Order Protection would prevent certain Orders from 
executing or being placed on the Order Book at prices outside pre-set 
standard limits. The System would not accept such Orders, rather than 
executing them automatically. The proposed LOP and Market Order 
Protection features are similar to risk features which exist today on 
the NASDAQ Options Market LLC (``NOM'') \3\ and are available for 
Options Participants.
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    \3\ See NOM Rules at Chapter VI, Section 6(c) and Section 18.
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Background
    Today, the National Market System Plan to Address Extraordinary 
Market Volatility (the ``Plan'') \4\ provides a limit up-limit down 
(``LULD'') mechanism designed to prevent trades in NMS securities from 
occurring outside of specified price bands. The bands are set at a 
percentage level above and below the average transaction price of the 
security over the immediately preceding five-minute period, and are 
calculated on a continuous basis during regular trading hours.\5\ Rule 
4120, entitled ``Limit Up-Limit Down Plan and Trading Halts,'' 
describes this process for the Nasdaq Market Center.
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    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, 
on a Pilot Basis, the National Market System Plan To Address 
Extraordinary Market Volatility). See also Rule 608 of Regulation 
NMS under the Act.
    \5\ If the National Best Offer (``NBO'') equals the lower price 
band without crossing the NBBO, or National Best Bid (``NBB'') 
equals the upper price band without crossing the NBBO, then the 
stock will enter a limit state quotation period of 15 seconds during 
which no new reference prices or price bands will be calculated. A 
stock will exit the limit state when the entire size of all 
quotations are executed or cancelled. If the limit state exists and 
trading continues to occur at the price band, or no trading occurs 
within the price band, for more than 15 seconds, then a five minute 
trading pause will be enacted.
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    The Exchange proposes to adopt two new features, LOP for Limit 
Orders and Market Order Protection for Market Orders, which would 
cancel these Orders back to the member when the order exceeds certain 
defined logic. These two new features would be in addition to the LULD 
protections, which exist today.\6\ Each mechanism is explained further 
below.
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    \6\ While LULD bands are in place from 9:30 to 4:00 p.m. E.T. 
each trading day, these new protections will be in place for each 
trading session.
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LOP
    The Exchange proposes to adopt a new LOP feature on the Nasdaq 
Market Center to prevent certain Limit Orders at prices outside of pre-
set standard limits (``LOP Limit Table'') from being accepted by the 
System. LOP shall apply to all Quotes and Orders,\7\ including any 
modified Orders.\8\ LOP would not apply to Market Orders. LOP would be 
operational each trading day, except during opening and closing 
crosses, initial public offerings and trading halts.\9\ Since Nasdaq 
Rules provided controls for the opening, closing and initial public 
offering processes within the Rulebook, the proposed protections are 
rendered ineffective for those processes.\10\

[[Page 4685]]

Members will be subject to certain parameters when submitting Orders 
into the Order Book.
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    \7\ An Intermarket Sweep or ISO Order, which is an Order that is 
immediately executable within the Nasdaq Market Center against 
Orders against which they are marketable, is subject to LOP. See 
NASDAQ Rule 4702.
    \8\ If an Order is modified, LOP will review the order anew and, 
if LOP is triggered, such modification will not take effect and the 
original order will not be accepted.
    \9\ LOP has the ability to suspend by symbol or system wide. The 
Exchange would notify market participants of any suspension that may 
be in place via an alert.
    \10\ The Nasdaq Rulebook provides specific rules for certain 
auction mechanisms, such as the opening, closing and initial public 
offering process. The mechanisms contain their own protections with 
respect to the entry of Orders within those mechanisms. The addition 
of the proposed protections does not add value in the Exchange's 
analysis of those structures.
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    The Exchange proposes to not accept incoming Limit Orders that 
exceed the LOP Reference Threshold. The LOP Limit Table contains upper 
limits and lower limits, for a particular security, across all trading 
sessions. For example, today, if the NBO is at $50 and a Limit Buy 
Order was entered into the System at $500, the Limit Buy Order would 
execute at $50 and then would continue to be executed at other 
applicable price levels within the Order Book until the Limit Buy Order 
was canceled or halted. The Exchange proposes LOP to avoid a series of 
improperly priced aggressive orders transacting in the Order Book.
    With respect to Market Maker Peg Orders,\11\ the applicable limits 
shall be two times greater than the limits stated in the LOP Limit 
Table. A Market Maker Peg Order is a passive Order type which will not 
otherwise remove liquidity from the Order Book. This Order type was 
designed to assist Market Makers with meeting their quoting obligations 
which may require quoting at levels that are not standardized with LULD 
guidelines. Market Makers have a diverse business model as compared 
with other market participants. Widening the applicable limits for 
these market participants serves to promote market making. The Exchange 
believes that because Market Makers have other risk protections in 
place to prevent them from quoting outside of their financial means, 
the risk level for erroneous trades is not the same as with other 
market participants. Market Makers have more sophisticated 
infrastructures than other market participants and are able to manage 
their risk, particularly with quoting, utilizing other tools which may 
not be available to other market participants.
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    \11\ A ``Market Maker Peg Order'' is an Order Type designed to 
allow a Market Maker to maintain a continuous two-sided quotation at 
a displayed price that is compliant with the quotation requirements 
for Market Makers set forth in Rule 4613(a)(2). The displayed price 
of the Market Maker Peg Order is set with reference to a ``Reference 
Price'' in order to keep the displayed price of the Market Maker Peg 
Order within a bounded price range. A Market Maker Peg Order may be 
entered through RASH, FIX or QIX only. A Market Maker Peg Order must 
be entered with a limit price beyond which the Order may not be 
priced. The Reference Price for a Market Maker Peg Order to buy 
(sell) is the then-current National Best Bid (National Best Offer) 
(including Nasdaq), or if no such National Best Bid or National Best 
Offer, the most recent reported last-sale eligible trade from the 
responsible single plan processor for that day, or if none, the 
previous closing price of the security as adjusted to reflect any 
corporate actions (e.g., dividends or stock splits) in the security. 
See Nasdaq Rule 4702(b)(7).
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    The Exchange will send an Equity Trader Alert in advance of 
implementation with the initial LOP Limit Table and, thereafter, to 
modify the LOP Limit Table. The initial LOP Limit Table utilizes the 
same limits as LULD to compare against the LOP Reference Threshold. The 
Exchange believes that utilizing the same tiers and bands will seek to 
provide additional market protection to Nasdaq members that submit 
erroneous trades, prior to reaching LULD limits. The initial LOP table 
is below.

------------------------------------------------------------------------
                                                         Price band
         Securities                Time period           percentage
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Tier 1 and Tier 2 NMS         Market Hours,         5% (Tier 1) & 10%
 Securities Reference Price    excluding Open/       (Tier 2).
 > $3.00.                      Close (9:45 a.m. to
                               3:35 p.m.).
Tier 1 and Tier 2 NMS         Market Hours,         20%.
 Securities Reference Price    excluding Open/
 equal to $0.75 to and         Close (9:45 a.m. to
 including $3.00.              3:35 p.m.).
Tier 1 & 2 NMS Securities     Market Hours,         The lesser of $0.15
 Reference Price Less than     excluding Open/       or 75%.
 $0.75.                        Close (9:45 a.m. to
                               3:35 p.m.).
Tier 1 and Tier 2 NMS         During Market Open/   10% & 20% Note: Band
 Securities Reference Price    Close 4:00 a.m. and   % is doubled during
 > $3.00.                      9:45 a.m. 3:35 p.m.   these times.
                               and 8:00 p.m.
Tier 1 and Tier 2 NMS         During Market Open/   40% Note: Band % is
 Securities Reference Price    Close 4:00 a.m. and   doubled during
 equal to $0.75 to and         9:45 a.m. 3:35 p.m.   these times.
 including $3.00.              and 8:00 p.m. Same
                               as above.
Tier 1 and Tier 2 NMS         During Market Open/   Lesser of $0.30 or
 Securities Reference Price    Close 4:00 a.m. and   150% (upper band
 less than $0.75.              9:45 a.m. 3:35 p.m.   only) Note: Band %
                               and 8:00 p.m.         is doubled during
                                                     these times.
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    LOP will cause Limit Orders to not be accepted if the price of the 
Limit Order is greater than the LOP Reference Threshold for a buy Limit 
Order. Limit Orders will also not be accepted if the price of the Limit 
Order is less than the LOP Reference Threshold for a sell Limit Order.
    The Exchange believes that doubling the band percentage for pre-
open and post-close sessions is reasonable due to the volatility which 
may occur in the market during those trading sessions. The LULD Plan 
also doubles the percentages for pre-open and post-close thereby 
aligning this protection with the LULD Plan.\12\
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    \12\ The LULD Plan provides that between 9:30 a.m. and 9:45 a.m. 
ET, and 3:35 p.m. and 4:00 p.m. ET, or in the case of an early 
scheduled close, during the last 25 minutes of trading before the 
early scheduled close, the Price Bands shall be calculated by 
applying double the Percentage Parameters set forth in Appendix A. 
See Rule 608 of Regulation NMS under the Act.
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    The LOP Reference Price shall be the current consolidated national 
Best Bid or Best Offer (consolidated NBBO), the Bid for sell orders and 
the Offer for buy orders. If there is no consolidated NBBO for a 
security, or if there is a one-sided market, the last regular way 
consolidated sale, adjusted for corporate actions, if any, will be the 
LOP Reference Price. If there is no last regular way consolidated sale 
on that trade date, then the prior day's adjusted close will be the LOP 
Reference Price.
    The LOP Reference Threshold for buy orders will be the LOP 
Reference Price (offer) plus the applicable percentage specified in the 
LOP Limit Table. The LOP Reference Threshold for sell orders will be 
the LOP Reference Price (bid) minus the applicable percentage specified 
in the LOP Limit Table.
Market Order Protection
    With respect to Market Orders, these Orders will not be accepted if 
the security is in an LULD Straddle State.\13\ If the offer is in a 
Straddle State then all buy Market Orders will not be accepted. If the 
bid is in a Straddle State than all

[[Page 4686]]

sell market orders will not be accepted. The Exchange believes that 
this Market Order Protection feature will prevent Participants from 
executing Market Orders that stray widely from the LULD defined 
reference price.
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    \13\ The LULD Plan defines a Straddle State as when the National 
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and 
the NMS Stock is not in a Limit State. For example, assume the Lower 
Price Band for an NMS Stock is $9.50 and the Upper Price Band is 
$10.50, such NMS stock would be in a Straddle State if the National 
Best Bid were below $9.50, and therefore non-executable, and the 
National Best Offer were above $9.50 (including a National Best 
Offer that could be above $10.50). If an NMS Stock is in a Straddle 
State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a Trading 
Pause for that NMS Stock. See Section VII(A)(2) of the Plan.
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    The Exchange also notes that both LOP and Market Order Protection 
will be applicable to all protocols.\14\ Both the LOP and Market Order 
Protection features will be mandatory for all Nasdaq members. The 
Exchange proposes to implement this rule within ninety (90) days of the 
implementation date. The Exchange will issue an Equities Trader Alert 
in advance to inform market participants of such implementation date.
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    \14\ Nasdaq maintains several communications protocols for 
Participants to use in entering Orders and sending other messages to 
the Nasdaq Market Center, such as: OUCH, RASH, QIX, FLITE and FIX.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ in particular, in that it is 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, in general to protect investors and the public 
interest, by mitigating risks to market participants of human error in 
entering Orders at clearly unintended prices. Also, the Market Order 
Protection feature would protect Market Orders from being executed in 
very wide markets when those prices are compared to the reference 
price. The Exchange believes that the proposals are appropriate and 
reasonable, because they offer protections to both Limit and Market 
Orders which should encourage price continuity and, in turn, protect 
investors and the public interest by reducing executions occurring at 
dislocated prices.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed LOP and Market Order 
Protection features would assist with the maintenance of fair and 
orderly markets by mitigating the risks associated with errors 
resulting in executions at prices that are away from the Best Bid or 
Offer and potentially erroneous. Further the proposal protects 
investors from potentially receiving executions away from the 
prevailing prices at any given time.
    The Exchange believes that the LOP Limit Table is appropriate 
because it is based on the current LULD bands. The Exchange believes 
that the proposed specified percentages are appropriate because LOP and 
is designed to reduce the risk of, and to potentially prevent, the 
automatic execution of Orders at prices that may be considered clearly 
erroneous. The System will only execute Limit Orders priced within the 
LOP Limit Table or within the upper (lower) band of LULD, if the latter 
is more conservative.
    The Exchange believes that the proposal to not accept System Orders 
in a Straddle State will prevent Market Orders from being entered by 
market participants at erroneous prices which the Exchange believes 
would stray widely from the LULD defined reference price.
    The Exchange believes LOP and Market Order Protection will remove 
impediments to and perfect the mechanisms of a free and open market 
because these features will operate in tandem with LULD.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the LOP 
and Market Order Protection features will provide market participants 
with additional protection from anomalous executions, in addition to 
LULD protections. Thus, the Exchange does not believe the proposal 
creates any significant impact on competition. These types of risk 
protections are in place today for NOM Participants.\17\ The Exchange 
believes that offering these protections to the Nasdaq Market Center 
will not impose any undue burden on intra-market competition, rather, 
it would permit equities and options members to be protected in a 
similar manner from erroneous executions.
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    \17\ See NOM Rules at Chapter VI, Section 6(c) and Section 18.
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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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the 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-2016-005 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-2016-005. 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-2016-005 and should 
be

[[Page 4687]]

submitted on or before February 17, 2016.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Brent J. Fields,
Secretary.
[FR Doc. 2016-01538 Filed 1-26-16; 8:45 am]
BILLING CODE 8011-01-P


