
[Federal Register Volume 81, Number 63 (Friday, April 1, 2016)]
[Notices]
[Pages 18925-18931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07333]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77456; File No. SR-NASDAQ-2016-043]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt Rule 4770 To Implement the Regulation NMS Plan To Implement a 
Tick Size Pilot Program

March 28, 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 March 23, 2016, 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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to a proposal to adopt Exchange Rule 4770 to 
implement the Regulation NMS Plan to Implement a Tick Size Pilot 
Program (``Plan''). The proposed rule change is substantially similar 
to proposed rule changes recently approved or published by the 
Commission by the Bats BZX Exchange, Inc. f/k/a BATS Exchange, Inc. 
(``BZX'') to adopt BZX Rule 11.27(b) which also sets forth requirements 
for the collection and transmission of data pursuant to Appendices B 
and C of the Plan.\3\
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    \3\ See Securities Exchange Act Release No. 77105 (February 10, 
2016), 81 FR 8112 (February 17, 2016) (order approving SR-BATS-2015-
102); see also Securities Exchange Act Release No. 77310 (March 7, 
2016), 81 FR 13012 (March 11, 2016) (notice for comment and 
immediate effectiveness of SR-BATS-2016-27).
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    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.

[[Page 18926]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, 
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc. (``FINRA''), NASDAQ BX, Inc., NASDAQ PHLX LLC, the 
Nasdaq Stock Market LLC, New York Stock Exchange LLC (``NYSE''), NYSE 
MKT LLC, and NYSE Arca, Inc. (collectively ``Participants''), filed 
with the Commission, pursuant to Section 11A of the Act \4\ and Rule 
608 of Regulation NMS thereunder,\5\ the Plan to Implement a Tick Size 
Pilot Program (``Pilot'').\6\
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    \4\ 15 U.S.C. 78k-1.
    \5\ 17 CFR 242.608.
    \6\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
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    The Participants filed the Plan to comply with an order issued by 
the Commission on June 24, 2014.\7\ The Plan \8\ was published for 
comment in the Federal Register on November 7, 2014, and approved by 
the Commission, as modified, on May 6, 2015.\9\
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    \7\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \8\ Capitalized terms used in this rule filing are defined in 
the Plan, unless otherwise specified herein.
    \9\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan. As is described more fully below, the 
proposed rules would require Members \10\ to comply with the applicable 
data collection requirements of the Plan.\11\
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    \10\ The term ``Member'' or ``Nasdaq Member'' is defined as 
``any registered broker or dealer that has been admitted to 
membership in Nasdaq. A Nasdaq Member is not a member of Nasdaq 
within the meaning of the Delaware Limited Liability Company Act by 
reason of being admitted to membership in Nasdaq.'' See Exchange 
Rule 0120(i).
    \11\ The Exchange proposes Commentary .11 to Rule 4770 to 
provide that the Rule shall be in effect during a pilot period to 
coincide with the pilot period for the Plan (including any 
extensions to the pilot period for the Plan).
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    The Pilot will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Pilot will consist of a control group 
of approximately 1400 Pilot Securities and three test groups with 400 
Pilot Securities in each (selected by a stratified random sampling 
process).\12\ During the pilot, Pilot Securities in the control group 
will be quoted at the current tick size increment of $0.01 per share 
and will trade at the currently permitted increments.
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    \12\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
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    Pilot Securities in the first test group (``Test Group One'') will 
be quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\13\ Pilot Securities in 
the second test group (``Test Group Two'') will be quoted in $0.05 
minimum increments and will trade at $0.05 minimum increments subject 
to a midpoint exception, a retail investor order exception, and a 
negotiated trade exception.\14\ Pilot Securities in the third test 
group (``Test Group Three'') will be subject to the same quoting and 
trading increments as Test Group Two and also will be subject to the 
``Trade-at'' requirement to prevent price matching by a market 
participant that is not displaying at a Trading Center's ``Best 
Protected Bid'' or ``Best Protected Offer,'' unless an enumerated 
exception applies.\15\ In addition to the exceptions provided under 
Test Group Two, an exception for Block Size orders and exceptions that 
mirror those under Rule 611 of Regulation NMS \16\ will apply to the 
Trade-at requirement.
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    \13\ See Section VI(B) of the Plan.
    \14\ See Section VI(C) of the Plan.
    \15\ See Section VI(D) of the Plan.
    \16\ 17 CFR 242.611.
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    In approving the Plan, the Commission noted that the Trading Center 
data reporting requirements would facilitate an analysis of the effects 
of the Pilot on liquidity (e.g., transaction costs by order size), 
execution quality (e.g., speed of order executions), market maker 
activity, competition between trading venues (e.g., routing frequency 
of market orders), transparency (e.g., choice between displayed and 
hidden orders), and market dynamics (e.g., rates and speed of order 
cancellations).\17\
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    \17\ See Approval Order, 80 FR at 27543.
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    The Commission also noted that Market Maker profitability data 
would assist the Commission in evaluating the effect, if any, of a 
widened tick increment on market marker profits and any corresponding 
changes in the liquidity of small-capitalization securities.\18\
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    \18\ Id.
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Compliance With the Data Collection Requirements of the Plan
    The Plan contains requirements for collecting and transmitting data 
to the Commission and to the public.\19\ Specifically, Appendix B.I of 
the Plan (Market Quality Statistics) requires Trading Centers \20\ to 
submit variety of market quality statistics, including information 
about an order's original size, whether the order was displayable or 
not, the cumulative number of orders, the cumulative number of shares 
of orders, and the cumulative number of shares executed within specific 
time increments, e.g., from 30 seconds to less than 60 seconds after 
the time of order receipt. This information shall be categorized by 
security, order type, original order size, hidden status, and coverage 
under Rule 605.\21\ Appendix B.I of the Plan also contains additional 
requirements for market orders and marketable limit orders, including 
the share-weighted average effective spread for executions of orders; 
the cumulative number of shares of orders executed with price 
improvement; and, for shares executed with price improvement, the 
share-weighted average amount per share that prices were improved.
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    \19\ The Exchange is also required by the Plan to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with applicable quoting and trading 
requirements specified in the Plan. The Exchange intends to 
separately propose rules that would require compliance by its 
Members with the applicable quoting and trading requirements 
specified in the Plan, and has reserved Paragraph (a) for such 
rules.
    \20\ The Plan incorporates the definition of a ``Trading 
Center'' from Rule 600(b)(78) of Regulation NMS. Regulation NMS 
defines a ``Trading Center'' as ``a national securities exchange or 
national securities association that operates an SRO trading 
facility, an alternative trading system, an exchange market maker, 
an OTC market maker, or any other broker or dealer that executes 
orders internally by trading as principal or crossing orders as 
agent.'' See 17 CFR 242.600(b).
    \21\ 17 CFR 242.605.
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    Appendix B.II of the Plan (Market and Marketable Limit Order Data) 
requires Trading Centers to submit information relating to market 
orders and marketable limit orders, including the time of order 
receipt, order type, the order size, the National Best Bid and National 
Best Offer (``NBBO'') quoted price, the NBBO quoted depth, the average 
execution price-share-weighted average, and the average execution time-
share-weighted average.
    The Plan requires Appendix B.I and B.II data to be submitted by 
Participants

[[Page 18927]]

that operate a Trading Center, and by members of the Participants that 
operate Trading Centers. The Plan provides that each Participant that 
is the Designated Examining Authority (``DEA'') for a member of the 
Participant that operates a Trading Center shall collect such data in a 
pipe delimited format, beginning six months prior to the Pilot Period 
and ending six months after the end of the Pilot Period. The Plan also 
requires the Participant, operating as DEA, to transmit this 
information to the SEC within 30 calendar days following month end.
    The Exchange is therefore proposing Rule 4770(b) to set forth the 
requirements for the collection and transmission of data pursuant to 
Appendices B and C of the Plan. Proposed Rule 4770(b) is substantially 
similar to proposed rule changes by BZX that were recently approved or 
published by the Commission to adopt BZX Rule 11.27(b) which also sets 
forth requirements for the collection and transmission of data pursuant 
to Appendices B and C of the Plan.\22\
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    \22\ See supra note 3.
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    Proposed Rule 4770(b)(1) requires that a Member that operates a 
Trading Center shall establish, maintain, and enforce written policies 
and procedures that are reasonably designed to comply with the data 
collection and transmission requirements of Items I and II to Appendix 
B of the Plan, and a Member that is a Market Maker shall establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the data collection and transmission 
requirements of Item IV of Appendix B of the Plan and Item I of 
Appendix C of the Plan.
    Proposed Rule 4770(b)(2) provides that the Exchange shall collect 
and transmit to the SEC the data described in Items I and II of 
Appendix B of the Plan relating to trading activity in Pre-Pilot 
Securities and Pilot Securities on a Trading Center operated by the 
Exchange. The Exchange shall transmit such data to the SEC in a pipe 
delimited format, on a disaggregated basis by Trading Center, within 30 
calendar days following month end for: (i) Each Pre-Pilot Data 
Collection Security for the period beginning six months prior to the 
Pilot Period through the trading day immediately preceding the Pilot 
Period; and (ii) each Pilot Security for the period beginning on the 
first day of the Pilot Period through six months after the end of the 
Pilot Period. The Exchange also shall make such data publicly available 
on the Exchange Web site on a monthly basis at no charge and will not 
identify the Member that generated the data.
    Appendix B.IV (Daily Market Maker Participation Statistics) 
requires a Participant to collect data related to Market Maker 
participation from each Market Maker \23\ engaging in trading activity 
on a Trading Center operated by the Participant. The Exchange is 
therefore proposing Rule 4770(b)(3) to gather data about a Market 
Maker's participation in Pilot Securities and Pre-Pilot Data Collection 
Securities. Proposed Rule 4770(b)(3)(A) provides that a Member that is 
a Market Maker shall collect and transmit to their DEA data relating to 
Item IV of Appendix B of the Plan with respect to activity conducted on 
any Trading Center in Pilot Securities and Pre-Pilot Data Collection 
Securities in furtherance of its status as a registered Market Maker, 
including a Trading Center that executes trades otherwise than on a 
national securities exchange, for transactions that have settled or 
reached settlement date.
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    \23\ The Plan defines a Market Maker as ``a dealer registered 
with any self-regulatory organization, in accordance with the rules 
thereof, as (i) a market maker or (ii) a liquidity provider with an 
obligation to maintain continuous, two-sided trading interest.''
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    The proposed rule requires Market Makers to transmit such data in a 
format required by their DEA, by 12:00 p.m. EST on T+4 for: (i) 
Transactions in each Pre-Pilot Data Collection Security for the period 
beginning six months prior to the Pilot Period through the trading day 
immediately preceding the Pilot Period; and (ii) for transactions in 
each Pilot Security for the period beginning on the first day of the 
Pilot Period through six months after the end of the Pilot Period.
    The Exchange understands that some Members may utilize a DEA that 
is not a Participant to the Plan and that their DEA would not be 
subject to the Plan's data collection requirements. In such case, a DEA 
that is not a Participant of the Plan would not have an obligation to 
collect the data required under subparagraph (b)(3)(A) of Rule 4770 and 
in accordance with Item IV of Appendix B of the Plan. Therefore, the 
Exchange proposes to adopt subparagraph (b)(3)(B) to Rule 4770 to 
require a Member that is a Market Maker whose DEA is not a Participant 
to the Plan to transmit the data collected pursuant to paragraph (3)(A) 
of Rule 4770(b) to FINRA, which is a Participant to the Plan and is to 
collect data relating to Item IV of Appendix B of the Plan on behalf of 
the Participants. For Market Makers for which it is the DEA, FINRA 
issued a Market Maker Transaction Data Technical Specification to 
collect data on Pre-Pilot Data Collection Securities and Pilot 
Securities from Trading Centers to comply with the Plan's data 
collection requirements.\24\
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    \24\ FINRA members for which FINRA is their DEA should refer to 
the Market Maker Transaction Data Technical Specification on the 
FINRA Web site at http://www.finra.org/sites/default/files/market-maker-transaction-data-tech-specs.pdf.
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    Proposed Rule 4770(b)(3)(C) provides that the Exchange shall 
transmit the data collected by the DEA or FINRA pursuant to Rule 
4770(b)(3)(A) and (B) above relating to Market Maker activity on a 
Trading Center operated by the Exchange to the SEC in a pipe delimited 
format within 30 calendar days following month end. The Exchange shall 
also make such data publicly available on the Exchange Web site on a 
monthly basis at no charge and shall not identify the Trading Center 
that generated the data.
    Appendix C.I (Market Maker Profitability) requires a Participant to 
collect data related to Market Maker profitability from each Market 
Maker for which it is the DEA. Specifically, the Participant is 
required to collect the total number of shares of orders executed by 
the Market Maker; the raw Market Maker realized trading profits, and 
the raw Market Maker unrealized trading profits. Data shall be 
collected for dates starting six months prior to the Pilot Period 
through six months after the end of the Pilot Period. This data shall 
be collected on a monthly basis, to be provided in a pipe delimited 
format to the Participant, as DEA, within 30 calendar days following 
month end.
    Appendix C.II (Aggregated Market Maker Profitability) requires the 
Participant, as DEA, to aggregate the Appendix C.I data, and to 
categorize this data by security as well as by the control group and 
each Test Group. That aggregated data shall contain information 
relating to total raw Market Maker realized trading profits, volume-
weighted average of raw Market Maker realized trading profits, the 
total raw Market Maker unrealized trading profits, and the volume-
weighted average of Market Maker unrealized trading profits.
    The Exchange is therefore proposing Rule 4770(b)(4) to set forth 
the requirements for the collection and transmission of data pursuant 
to Appendix C.I of the Plan. Proposed Rule 4770(b)(4)(A) requires that 
a Member that is a Market Maker shall collect and transmit to their DEA 
the data described in Item I of Appendix C of the Plan with respect to 
executions in Pilot Securities that have settled or reached settlement 
date that were executed on any Trading Center.
    The proposed rule also requires Members to provide such data in a 
format required by their DEA by 12 p.m.

[[Page 18928]]

EST on T+4 for executions during and outside of Regular Trading Hours 
in each: (i) Pre-Pilot Data Collection Security for the period 
beginning six months prior to the Pilot Period through the trading day 
immediately preceding the Pilot Period; and (ii) Pilot Security for the 
period beginning on the first day of the Pilot Period through six 
months after the end of the Pilot Period.
    For the same reasons set forth above for subparagraph (b)(3)(B) to 
Rule 4770, the Exchange proposes to adopt subparagraph (b)(4)(B) to 
Rule 4770 to require a Member that is a Market Maker whose DEA is not a 
Participant to the Plan to transmit the data collected pursuant to 
paragraph (4)(A) of Rule 4770(b) to FINRA. As stated above, FINRA is a 
Participant to the Plan and is to collect data relating to Item I of 
Appendix C of the Plan on behalf of the Participants. For Market Makers 
for which it is the DEA, FINRA issued a Market Maker Transaction Data 
Technical Specification to collect data on Pre-Pilot Data Collection 
Securities and Pilot Securities from Trading Centers to comply with the 
Plan's data collection requirements.\25\
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    \25\ Id.
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    The Exchange is also adopting a rule setting forth the manner in 
which Market Maker participation will be calculated. Item III of 
Appendix B of the Plan requires each Participant that is a national 
securities exchange to collect daily Market Maker registration 
statistics categorized by security, including the following 
information: (i) Ticker symbol; (ii) the Participant exchange; (iii) 
number of registered market makers; and (iv) the number of other 
registered liquidity providers.
    Therefore, the Exchange proposes to adopt Rule 4770(b)(5) providing 
that the Exchange shall collect and transmit to the SEC the data 
described in Item III of Appendix B of the Plan relating to daily 
Market Maker registration statistics in a pipe delimited format within 
30 calendar days following month end for: (i) Transactions in each Pre-
Pilot Data Collection Security for the period beginning six months 
prior to the Pilot Period through the trading day immediately preceding 
the Pilot Period; and (ii) transactions in each Pilot Security for the 
period beginning on the first day of the Pilot Period through six 
months after the end of the Pilot Period.
    The Exchange is also proposing, through Commentary, to clarify 
other aspects of the data collection requirements.\26\ Proposed 
Commentary .02 relates to the use of the retail investor order flag for 
purposes of Appendix B.II(n) reporting. The Plan currently states that 
market and marketable limit orders shall include a ``yes/no'' field 
relating to the Retail Investor Order flag. The Exchange is proposing 
Commentary .02 to clarify that, for purposes of the reporting 
requirement in Appendix B.II(n), a Trading Center shall report ``y'' to 
their DEA where it is relying upon the Retail Investor Order exception 
to Test Groups Two and Three, and ``n'' for all other instances.\27\ 
The Exchange believes that requiring the identification of a Retail 
Investor Orders only where the exception may apply (i.e., Pilot 
Securities in Test Groups Two and Three) is consistent with Appendix 
B.II(n).
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    \26\ The Exchange is also proposing Commentary .01 to Rule 4770 
to clarify that certain enumerated terms used throughout Rule 4770 
shall have the same meaning as set forth in the Plan.
    \27\ FINRA, on behalf of the Plan Participants submitted a 
letter to Commission requesting exemption from certain provisions of 
the Plan related to data collection. See letter from Marcia E. 
Asquith, Senior Vice President and Corporate Secretary, FINRA dated 
December 9, 2015 to Robert W. Errett, Deputy Secretary, Commission 
(``Exemption Request''). The Commission, pursuant to its authority 
under Rule 608(e) of Regulation NMS, granted BZX a limited exemption 
from the requirement to comply with certain provisions of the Plan 
as specified in the letter and noted herein. See letter from David 
Shillman, Associate Director, Division of Trading and Markets, 
Commission, to Eric Swanson, General Counsel, BZX, dated February 
10, 2016 (``Exemption Letter'').
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    Commentary .03 requires that Members populate a field to identify 
to their DEA whether an order is affected by the bands in place 
pursuant to the National Market System Plan to Address Extraordinary 
Market Volatility.\28\ Pursuant to the Limit-Up Limit-Down Plan, 
between 9:30 a.m. and 4:00 p.m., the Securities Information Processor 
(``SIP'') calculates a lower price band and an upper price band for 
each NMS stock. These price bands represent a specified percentage 
above or below the stock's reference price, which generally is 
calculated based on reported transactions in that stock over the 
preceding five minutes. When one side of the market for an individual 
security is outside the applicable price band, the SIP identifies that 
quotation as non-executable. When the other side of the market reaches 
the applicable price band (e.g., the offer reaches the lower price 
band), the security enters a Limit State. The stock would exit a Limit 
State if, within 15 seconds of entering the Limit State, all Limit 
State Quotations were executed or canceled in their entirety. If the 
security does not exit a Limit State within 15 seconds, then the 
primary listing exchange declares a five-minute trading pause, which 
would be applicable to all markets trading the security.
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    \28\ See National Market System Plan to Address Extraordinary 
Market Volatility, Securities Exchange Act Release No. 67091 (May 
31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (``Limit-Up 
Limit-Down Plan'').
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    The Exchange and the other Participants have determined that it is 
appropriate to create a new flag for reporting orders that are affected 
by the Limit-Up Limit-Down bands. Accordingly, a Trading Center shall 
report a value of ``Y'' to their DEA when the ability of an order to 
execute has been affected by the Limit-Up Limit-Down bands in effect at 
the time of order receipt. A Trading Center shall report a value of 
``N'' to their DEA when the ability of an order to execute has not been 
affected by the Limit-Up Limit-Down bands in effect at the time of 
order receipt.
    Commentary .03 also requires, for securities that may trade in a 
foreign market, that the Participant indicate whether the order was 
handled domestically, or routed to a foreign venue. Accordingly, the 
Participant will indicate, for purposes of Appendix B.I, whether the 
order was: (1) Fully executed domestically, or (2) fully or partially 
executed on a foreign market. For purposes of Appendix B.II, the 
Participant will classify all orders in securities that may trade in a 
foreign market Pilot and Pre-Pilot Securities as: (1) Directed to a 
domestic venue for execution; (2) may only be directed to a foreign 
venue for execution; or (3) was fully or partially directed to a 
foreign venue at the discretion of the member. The Exchange believes 
that this proposed flag will better identify orders in securities that 
may trade in a foreign market, as such orders that were routed to 
foreign venues would not be subject to the Plan's quoting and trading 
requirements, and could otherwise compromise the integrity of the data.
    Commentary .04 relates to the time ranges specified in Appendix 
B.I.a(14), B.I.a(15), B.I.a(21) and B.I.a(22).\29\ The Exchange and the 
other Participants have determined that it is appropriate to change the 
reporting times in these provisions to require more granular reporting 
for these categories.

[[Page 18929]]

Accordingly, the Exchange proposes to add Appendix B.I.a(14A), which 
will require Trading Centers to report the cumulative number of shares 
of orders executed from 100 microseconds to less than 1 millisecond 
after the time of order receipt. Appendix B.I.a(15) will be changed to 
require the cumulative number of shares of orders executed from 1 
millisecond to less than 100 milliseconds after the time of order 
receipt. The Exchange also proposes to add Appendix B.I.a(21A), which 
will require Trading Centers to report the cumulative number of shares 
of orders canceled from 100 microseconds to less than 1 millisecond 
after the time of order receipt. Appendix B.I.a(22) will be changed to 
require the cumulative number of shares of orders canceled from 1 
millisecond to less than 100 milliseconds after the time of order 
receipt. The Exchange believes that these new reporting requirements 
will contribute to a meaningful analysis of the Pilot by producing more 
granular data on these points.\30\
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    \29\ Specifically, Appendix B.I.a(14) requires reporting of the 
cumulative number of shares of orders executed from 0 to less than 
100 microseconds after the time of order receipt; Appendix B.I.a(15) 
requires reporting of the cumulative number of shares of orders 
executed from 100 microseconds to less than 100 milliseconds after 
the time of order receipt; Appendix B.I.a(21) requires reporting of 
the cumulative number of shares of orders cancelled from 0 to less 
than 100 microseconds after the time of order receipt; and Appendix 
B.I.a(22) requires reporting of the cumulative number of shares of 
orders cancelled from 100 microseconds to less than 100 milliseconds 
after the time of order receipt.
    \30\ The Commission granted BZX an exemption from Rule 608(c) 
related to this provision. See Exemption Letter, supra note 27.
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    Commentary .05 relates to the relevant measurement for purposes of 
Appendix B.I.a(31)-(33) reporting. Currently, the Plan states that this 
data shall be reported as of the time of order execution. The Exchange 
and the other Participants believe that this information should more 
properly be captured at the time of order receipt as evaluating share-
weighted average prices at the time of order receipt is more consistent 
with the goal of observing the effect of the Pilot on the liquidity of 
Pilot Securities. The Exchange is therefore proposing to make this 
change through Commentary .05.\31\ This change will make these 
provisions consistent with the remainder of the statistics in Appendix 
B.I.a, which are all based on order receipt.
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    \31\ The Commission granted BZX an exemption from Rule 608(c) 
related to this provision. See Exemption Letter, supra note 27.
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    Commentary .06 addresses the status of not-held and auction orders 
for purposes of Appendix B.I reporting. Currently, Appendix B.I sets 
forth eight categories of orders, including market orders, marketable 
limit orders, and inside-the-quote resting limit orders, for which 
daily market quality statistics must be reported. Currently, Appendix 
B.I does not provide a category for not held orders, clean cross 
orders, auction orders, or orders received when the NBBO is crossed.
    The Exchange and the other Participants have determined that it is 
appropriate to include separate categories for these orders types for 
purposes of Appendix B reporting. The Exchange is therefore proposing 
Commentary .06 to provide that not held orders shall be included as an 
order type for purposes of Appendix B reporting, and shall be assigned 
the number (18). Clean cross orders shall be included as an order type 
for purposes of Appendix B reporting, and shall be assigned the number 
(19); auction orders shall be included an as order type for purposes of 
Appendix B reporting, and shall be assigned the number (20); and orders 
that cannot otherwise be classified, including, for example, orders 
received when the NBBO is crossed shall be included as an order type 
for purposes of Appendix B reporting, and shall be assigned the number 
(21). All of these orders already are included in the scope of Appendix 
B; however, without this proposed change, these order types would be 
categorized with other orders, such as regular held orders, that should 
be able to be fully executed upon receipt, which would compromise the 
value of this data.
    The Exchange is proposing Commentary .07 to clarify the scope of 
the Plan as it relates to Members that only execute orders limited 
purposes. Specifically, The Exchange and the other Participants believe 
that a Member that only executes orders otherwise than on a national 
securities exchange for the purpose of: (1) Correcting a bona fide 
error related to the execution of a customer order; (2) purchasing a 
security from a customer at a nominal price solely for purposes of 
liquidating the customer's position; or (3) completing the fractional 
share portion of an order \32\ shall not be deemed a Trading Center for 
purposes of Appendix B to the Plan. The Exchange is therefore proposing 
Commentary .07 to make this clarification.
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    \32\ The Exchange notes that where a Member purchases a 
fractional share from a customer, the Trading Center that executes 
the remaining whole shares of that customer order would subject to 
subject to Appendix B of the Plan.
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    The Exchange is proposing Commentary .08 to clarify that, for 
purposes of the Plan, Trading Centers must begin the data collection 
required pursuant to Appendix B.I.a(1) through B.II.(y) of the Plan and 
Item I of Appendix C of the Plan on April 4, 2016. While the Exchange 
or the Member's DEA will provide the information required by Appendix B 
and C of the Plan during the Pilot Period, the requirement that the 
Exchange or their DEA provide information to the SEC within 30 days 
following month end and make such data publicly available on its Web 
site pursuant to Appendix B and C shall commence six months prior to 
the beginning of the Pilot Period.\33\
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    \33\ In its order approving the Plan, the SEC noted that the 
Pilot shall be implemented within one year of the date of 
publication of its order, e.g., by May 6, 2016. See Approval Order, 
80 FR at 27545. However, on November 6, 2015, the SEC extended the 
implementation date approximately five months to October 3, 2016. 
See Securities Exchange Act Release No. 76382 (November 6, 2015), 80 
FR 70284 (File No. 4-657) (Order Granting Exemption From Compliance 
With the National Market System Plan To Implement a Tick Size Pilot 
Program). See also Letter from Brendon J. Weiss, Co-Head, Government 
Affairs, Intercontinental Exchange/NYSE, to Brent J. Fields, 
Secretary, Commission, dated November 4, 2015 (requesting the data 
collection period be extended until six months after the requisite 
SRO rules are approved, and the implementation data of the Tick Size 
Pilot until six months thereafter).
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    The Exchange is proposing Commentary .09 to address the requirement 
in Appendix C.I(b) of the Plan that the calculation of raw Market Maker 
realized trading profits utilize a last in, first out (``LIFO'')-like 
method to determine which share prices shall be used in that 
calculation. The Exchange and the other Participants believe that it is 
more appropriate to utilize a methodology that yields LIFO-like 
results, rather than utilizing a LIFO-like method, and the Exchange is 
therefore proposing Commentary .09 to make this change.\34\
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    \34\ Appendix C.I currently requires Market Maker profitability 
statistics to include (1) the total number of shares of orders 
executed by the Market Maker; (2) raw Market Maker realized trading 
profits, which is the difference between the market value of Market 
Maker shares and the market value of Market Maker purchases, using a 
LIFO-like method; and (3) raw Market Maker unrealized trading 
profits, which is the difference between the purchase or sale price 
of the end-of-day inventory position of the Market Maker and the 
Closing Price. In the case of a short position, the Closing Price 
from the sale will be subtracted; in the case of a long position, 
the purchase price will be subtracted from the Closing Price.
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    The Exchange is proposing that, for purposes of Item I of Appendix 
C, the Participants shall calculate daily Market Maker realized 
profitability statistics for each trading day on a daily LIFO basis 
using reported trade price and shall include only trades executed on 
the subject trading day. The daily LIFO calculation shall not include 
any positions carried over from previous trading days. For purposes of 
Item I.c of Appendix C, the Participants shall calculate daily Market 
Maker unrealized profitability statistics for each trading day on an 
average price basis.
    Specifically, the Participants must calculate the volume weighted 
average price of the excess (deficit) of buy volume over sell volume 
for the current trading day using reported trade price. The gain (loss) 
of the excess (deficit) of buy volume over sell volume shall be

[[Page 18930]]

determined by using the volume weighted average price compared to the 
closing price of the security as reported by the primary listing 
exchange. In reporting unrealized trading profits, the Participant 
shall also report the number of excess (deficit) shares held by the 
Market Maker, the volume weighted average price of that excess 
(deficit) and the closing price of the security as reported by the 
primary listing exchange used in reporting unrealized profit.\35\
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    \35\ The Commission granted BZX an exemption from Rule 608(c) 
related to this provision. See Exemption Letter, supra note 27.
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    Finally, the Exchange is proposing Commentary .10 to address the 
securities that will be used for data collection purposes prior to the 
commencement of the Pilot. The Exchange and the other Participants have 
determined that it is appropriate to collect data for a group of 
securities that is larger, and using different quantitative thresholds, 
than the group of securities that will be Pilot Securities.
    The Exchange is therefore proposing Commentary .10 to define ``Pre-
Pilot Data Collection Securities'' as the securities designated by the 
Participants for purposes of the data collection requirements described 
in Items I, II, and IV of Appendix B and Item I of Appendix C of the 
Plan for the period beginning six months prior to the Pilot Period and 
ending on the trading day immediately preceding the Pilot Period.
    The Participants shall compile the list of Pre-Pilot Data 
Collection Securities by selecting all NMS stocks with a market 
capitalization of $5 billion or less, a Consolidated Average Daily 
Volume (CADV) of 2 million shares or less and a closing price of $1 per 
share or more. The market capitalization and the closing price 
thresholds shall be applied to the last day of the Pre-Pilot 
measurement period, and the CADV threshold shall be applied to the 
duration of the Pre-Pilot measurement period. The Pre-Pilot measurement 
period shall be the three calendar months ending on the day when the 
Pre-Pilot Data Collection Securities are selected. The Pre-Pilot Data 
Collection Securities shall be selected thirty days prior to the 
commencement of the six-month Pre-Pilot Period. On the trading day that 
is the first trading day of the Pilot Period through six months after 
the end of the Pilot Period, the data collection requirements will 
become applicable to the Pilot Securities only. A Pilot Security will 
only be eligible to be included in a Test Group if it was a Pre-Pilot 
Security.
Implementation Date
    The proposed rule change will be effective on April 4, 2016.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\36\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\37\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, 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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    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that this proposal is consistent with the Act 
because it implements and clarifies the provisions of the Plan, and is 
designed to assist the Exchange in meeting its regulatory obligations 
pursuant of the Plan. In approving the Plan, the SEC noted that the 
Pilot was an appropriate, data-driven test that was designed to 
evaluate the impact of a wider tick size on trading, liquidity, and the 
market quality of securities of smaller capitalization companies, and 
was therefore in furtherance of the purposes of the Act.
    The Exchange believes that this proposal is in furtherance of the 
objectives of the Plan, as identified by the SEC, and is therefore 
consistent with the Act because the proposal implements and clarifies 
the requirements of the Plan and applies specific obligations to 
Members in furtherance of compliance with the Plan.

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 notes that the 
proposed rule change implements the provisions of the Plan, and is 
designed to assist the Exchange in meeting its regulatory obligations 
pursuant of the Plan. The Exchange also notes that the data collection 
requirements for Members that operate Trading Centers will apply 
equally to all such Members, as will the data collection requirements 
for Market Makers.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \38\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\39\
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    \38\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \39\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \40\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \41\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay. The 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest because it 
would allow the Exchange to implement the proposed amendments on April 
4, 2016, the date upon which the data collection requirements of the 
Plan become effective.\42\ Therefore, the Commission hereby waives the 
operative delay and designates the proposal operative on April 4, 
2016.\43\
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    \40\ 17 CFR 240.19b-4(f)(6).
    \41\ 17 CFR 240.19b-4(f)(6)(iii).
    \42\ See Securities Exchange Act Release No. 76382 (November 6, 
2015), 80 FR 70284 (File No. 4-657) (Order Granting Exemption from 
Compliance With the National Market System Plan To Implement a Tick 
Size Pilot Program).
    \43\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in

[[Page 18931]]

the public interest; (ii) for the protection of investors; or (iii) 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-2016-043 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-043. 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-2016-043 and should 
be submitted on or before April 22, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
Robert W. Errett,
Deputy Secretary.
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    \44\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-07333 Filed 3-31-16; 8:45 am]
 BILLING CODE 8011-01-P


