
[Federal Register Volume 81, Number 41 (Wednesday, March 2, 2016)]
[Notices]
[Pages 10935-10937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04505]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77235; File No. SR-NASDAQ-2015-159]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change To Implement Additional Price 
Protections in the Opening Process

February 25, 2016.

I. Introduction

    On December 23, 2015, the NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') 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 enhance the price protections for the 
Exchange's opening process. The proposed rule change was published for 
comment in the Federal Register on January 11, 2016.\3\ The Commission 
received one comment letter on the proposed rule change.\4\ 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. 76833 (January 5, 
2016), 81 FR 1240 (``Notice'').
    \4\ See letter from Kermit Kubitz to the Commission, dated 
February 1, 2016 (``Kubitz Letter'').
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II. Description of the Proposal

    The Exchange proposes new paragraph (F) to Rule 4752(d)(2) to 
enhance the price protections for the Nasdaq Opening Cross.\5\
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    \5\ The term ``Nasdaq Opening Cross'' (hereinafter also referred 
to as ``Opening Cross'') is defined in Nasdaq Rule 4752(a)(5).
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Background

    Nasdaq Rule 4752(d) describes the Nasdaq Opening Cross process, and 
Rule 4752(d)(2)(A) through (E) sets forth the process for determining 
the price at which an Opening Cross occurs. Specifically, the Opening 
Cross occurs at 9:30 a.m. ET and occurs at the price that maximizes the 
number of shares of Market On Open orders (``MOO''), Limit On Open 
orders (``LOO''), Opening Imbalance Only orders (``OIO''), Early

[[Page 10936]]

Market Hours orders, and executable quotes and orders in the Nasdaq 
Market Center to be executed.\6\ If more than one price exists that 
would maximize such quotes and orders to be executed, then the Opening 
Cross occurs at the price that minimizes any imbalance.\7\ If more than 
one price exists that would minimize an imbalance, then the Opening 
Cross occurs at the entered price at which shares will remain 
unexecuted in the cross.\8\ If more than one price exists at which 
shares will remain unexecuted in the cross, then the Opening Cross 
occurs at the price that minimizes the distance from the bid-ask 
midpoint of the inside quotation prevailing at 9:30 a.m.\9\
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    \6\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(A). The 
MOO, LOO, and OIO order types are defined in Rules 4702(b)(8), 
(b)(9), and (b)(10), respectively; the Early Market Hours order type 
is defined in Rule 4752(a)(7).
    \7\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(B).
    \8\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(C).
    \9\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(D).
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    In addition to the calculation of the Opening Cross price pursuant 
to Rule 4752(d)(2)(A) through (D), the Exchange applies a price range 
within which the Opening Cross must execute in order to ensure that the 
Opening Cross price is reasonably tied to the prevailing market at the 
time.\10\ Specifically, the Exchange applies a percentage based 
threshold (``Threshold Percentage'') to a benchmark (``Benchmark 
Value'') to determine a specific value.\11\ That value is then applied 
to the spread for a particular security to determine the price range 
within which the Opening Cross for the security may occur (``Threshold 
Range''), and outside of which the Opening Cross for the security may 
not occur.\12\ Currently, the Threshold Percentage is 10% and the 
Benchmark Value is the midpoint of the Nasdaq Best Bid and Offer 
(``QBBO'').\13\ To establish the Threshold Range, the Exchange 
calculates 10% of the midpoint of the QBBO, and then adds the resulting 
value to the Nasdaq Best Offer and subtracts the resulting value from 
the Nasdaq Best Bid.\14\ If the Opening Cross price of a security 
established pursuant to Rule 4752(d)(2)(A) through (D) falls outside 
the Threshold Range, then the Exchange adjusts the Opening Cross price 
to a price within the Threshold Range that best satisfies the 
conditions of Rule 4752(d)(2)(A) through (D).\15\
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    \10\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(E).
    \11\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(E).
    \12\ See Notice, 81 FR at 1241; see also Rule 4752(d)(2)(E).
    \13\ See Notice, 81 FR at 1241. The Threshold Percentage and 
Benchmark Value are set by Nasdaq officials in advance and are 
published via the NasdaqTrader Web site. See id.
    \14\ See id.
    \15\ See id.; see also Rule 4752(d)(2)(E).
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    According to the Exchange, the current price adjustment process has 
been effective at ensuring that the Opening Cross price of a security 
falls within a certain range of the QBBO.\16\ However, an order or 
quote entered by a participant in error that establishes one side of 
the QBBO could result in an excessively wide QBBO and significantly 
skew the Opening Cross price of a security.\17\ The current price 
adjustment process would not prevent the Opening Cross from occurring 
at an erroneous price under these circumstances, because the price 
would still fall within the excessively wide Threshold Range, which 
would be calculated using the excessively wide QBBO.\18\ Under these 
circumstances, the parties to the erroneously priced transactions would 
have to avail themselves of the Exchange's clearly erroneous trade 
nullification process.\19\
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    \16\ See Notice, 81 FR at 1242.
    \17\ See id. The Commission understands that such a scenario is 
most likely to arise with illiquid securities.
    \18\ See id.
    \19\ See id.
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New Price Protections

    In order to mitigate the potential for mispriced Opening Crosses 
and the resulting need to use the Exchange's clearly erroneous trade 
nullification process, the Exchange proposes additional price 
protections for its opening process to help ensure that the Opening 
Cross price is reasonably related to the market and not the product of 
erroneous order entry.\20\ Specifically, in addition to the existing 
process for determining the Opening Cross price for a security, the 
Exchange would require the security to pass one of three new ``Opening 
Cross Price Tests'' in order for an Opening Cross in the security to 
occur.\21\ Each Opening Cross Price Test would specify a range within 
which the Opening Cross price must fall and, as discussed in more 
detail below, each price range is calculated by applying a threshold to 
a specific reference measure.\22\ The Exchange proposes to initially 
set the threshold for each Opening Cross Price Test at the greater of 
$0.50 or 10% of the reference measure, although the Exchange may adjust 
the thresholds for each Opening Cross Price Test independently of one 
another.\23\ If a security's Opening Cross price fails all three tests, 
then all MOO, LOO, OIO, and Early Market Hours orders in the Nasdaq 
Opening Cross in that security would be cancelled back to the 
participants, no Opening Cross would occur in that security, and the 
security would open for regular market hours trading consistent with 
Rule 4752(c).\24\
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    \20\ See id.
    \21\ See id.; see also proposed Rule 4752(d)(2)(F).
    \22\ See Notice, 81 FR at 1242; see also proposed Rule 
4752(d)(2)(F).
    \23\ See Notice, 81 FR at 1242. As proposed, Nasdaq management 
would set and modify the thresholds from time to time upon prior 
notice to market participants. See id.; see also proposed Rule 
4752(d)(2)(F). In addition, the Exchange states that the thresholds 
for the proposed Opening Cross Price Tests would be published via 
the NasdaqTrader Web site. See Notice, 81 FR at 1242.
    \24\ See Notice, 81 FR at 1242; see also proposed Rule 
4752(d)(2)(F).
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    Under Opening Cross Price Test A, for a Nasdaq-listed security, the 
Exchange would establish the Opening Cross price range by adding the 
threshold amount to and subtracting the threshold amount from the 
Nasdaq Official Closing Price of the security from the previous trading 
day. For non-Nasdaq-listed securities, the Exchange would establish the 
price range by adding the threshold amount to and subtracting the 
threshold amount from the consolidated closing price of the security 
from the previous trading day. For new Exchange Traded Products 
(``ETPs'') that do not have a Nasdaq Official Closing Price, the 
Exchange would establish the price range by adding the threshold amount 
to and subtracting the threshold amount from the offering price. If the 
Opening Cross price falls outside of the relevant price range, or if a 
security does not have a Nasdaq Official Closing Price or consolidated 
closing price from the previous trading day, then the security would 
fail Opening Cross Price Test A and the Exchange would perform Opening 
Cross Price Test B.\25\
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    \25\ See Notice, 81 FR at 1242; see also proposed Rule 
4752(d)(2)(F)(i).
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    Under Opening Cross Price Test B, the Exchange would establish the 
Opening Cross price range by adding the threshold amount to and 
subtracting the threshold amount from the Nasdaq last sale (either 
round lot or odd lot) after 9:15 a.m. ET but before the Opening Cross. 
If the Opening Cross price falls outside this price range, or if there 
is no Nasdaq last sale, then the security would fail Opening Cross 
Price Test B and the Exchange would perform Opening Cross Price Test 
C.\26\
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    \26\ See Notice, 81 FR at 1242; see also proposed Rule 
4752(d)(2)(F)(ii).
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    Under Opening Cross Price Test C, if the Opening Cross price is 
higher than the closing price used under Test A, then the Exchange 
would establish the

[[Page 10937]]

price range by adding the threshold amount to and subtracting the 
threshold amount from the Nasdaq Best Bid. If the Opening Cross price 
is lower than the closing price used under Test A, then the Exchange 
would establish the price range by adding the threshold amount to and 
subtracting the threshold amount from the Nasdaq Best Offer. If a 
security does not have a Nasdaq Official Closing Price or consolidated 
closing price, as applicable, then the Exchange would use a price of 
$0. If the Opening Cross price for a security falls outside of the 
relevant price range, then no Opening Cross would occur in the 
security; MOO, LOO, OIO, and Early Market Hours orders would be 
cancelled; and the Exchange would open that security for market hours 
trading consistent with Rule 4752(c).\27\
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    \27\ See Notice, 81 FR at 1242; see also proposed Rule 
4752(d)(2)(F)(iii).
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Implementation

    The Exchange proposes to implement the Opening Cross Price Tests in 
stages over the course of approximately four weeks, beginning with a 
small number of securities.\28\ The Exchange states that the 
implementation details would be published via an Exchange Trader Alert 
and be posted on the NasdaqTrader Web site.\29\
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    \28\ See Notice, 81 FR at 1243.
    \29\ See 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.\30\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\31\ 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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    \30\ 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).
    \31\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal is designed to enhance the 
price protections for the Exchange's opening process, to mitigate the 
potential for mispriced trades, and to mitigate the need to use the 
Exchange's clearly erroneous trade nullification process. In 
particular, as discussed above, the proposed Opening Cross Price Tests 
are designed to mitigate the potential for a mispriced Opening Cross 
when an order or quote entered by a participant in error establishes 
one side of the QBBO and significantly skews the Opening Cross price 
for the security. As noted by the Exchange, the proposal would help 
ensure that the Opening Cross price for a security is reasonably 
related to the market and not the product of erroneous order entry. The 
Commission also notes that a commenter expressed support for the 
proposal, stating that the ``proposed change to avoid a biased or 
erroneous opening due to an inadvertent or mistaken submission of a 
pre-open order and price is a reasonable change by NASDAQ.'' \32\ Based 
on the foregoing, the Commission believes that the proposed Opening 
Cross Price Tests are consistent with the Act.
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    \32\ See Kubitz Letter, supra note 4. This commenter also 
expressed broader concerns regarding the availability of information 
about pre-market activities and regarding the circumstances under 
which pre-market activities would constitute manipulation, in light 
of the events of August 24, 2015. See id.
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    The Commission also believes that the Exchange's proposal to 
implement the Opening Cross Price Tests in stages is consistent with 
the Act because it would help to limit potential market disruption if 
the Exchange experiences a technical issue with the implementation.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-NASDAQ-2015-159) be, and 
hereby is, approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04505 Filed 3-1-16; 8:45 am]
 BILLING CODE 8011-01-P


