
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)]
[Notices]
[Pages 44366-44372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16035]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78208; File No. SR-NASDAQ-2016-092]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Provide a Process for an Expedited Suspension Proceeding and Adopt a 
Rule To Prohibit Disruptive Quoting and Trading Activity

June 30, 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 June 22, 2016, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III 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 a proposal to adopt a new NASDAQ Options 
Market LLC rule to clearly prohibit disruptive quoting and trading 
activity on the Exchange, as further described below.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is filing this proposal to adopt an options rule to 
clearly prohibit disruptive quoting and trading activity on the 
Exchange and to permit the Exchange to take prompt action to suspend 
Members or their clients that violate such rule pursuant to Rule 9400.
Background
    As a national securities exchange registered pursuant to Section 6 
of the Act, the Exchange is required to be organized and to have the 
capacity to enforce compliance by its members and persons associated 
with its members, with the Act, the rules and regulations thereunder, 
and the Exchange's Rules. Further, the Exchange's Rules are required to 
be ``designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade . . . and, 
in general, to protect investors and the public interest.'' \3\ In 
fulfilling these requirements, the Exchange has developed a 
comprehensive regulatory program that includes automated surveillance 
of trading activity that is both operated directly by Exchange staff 
and by staff of the Financial Industry Regulatory Authority (``FINRA'') 
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive 
and potentially manipulative or improper quoting and trading activity 
is identified, the Exchange or FINRA (acting as an agent of the 
Exchange) conducts an investigation into the activity, requesting 
additional information from the Member or Members involved. To the 
extent violations of the Act, the rules and regulations thereunder, or 
Exchange Rules have been identified and confirmed, the Exchange or 
FINRA as its agent will commence the enforcement process, which might 
result in, among other things, a censure, a requirement to take certain 
remedial actions, one or more restrictions on future business

[[Page 44367]]

activities, a monetary fine, or even a temporary or permanent ban from 
the securities industry.
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    \3\ 15 U.S.C. 78f(b)(1).
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    The process described above, from the identification of disruptive 
and potentially manipulative or improper quoting and trading activity 
to a final resolution of the matter, can often take several years. The 
Exchange believes that this time period is generally necessary and 
appropriate to afford the subject Member adequate due process, 
particularly in complex cases. However, as described below, the 
Exchange believes that there are certain obvious and uncomplicated 
cases of disruptive and manipulative behavior or cases where the 
potential harm to investors is so large that the Exchange should have 
the authority to initiate an expedited suspension proceeding in order 
to stop the behavior from continuing on the Exchange.
    In recent years, several cases have been brought and resolved by 
the Exchange and other SROs that involved allegations of wide-spread 
market manipulation, much of which was ultimately being conducted by 
foreign persons and entities using relatively rudimentary technology to 
access the markets and over which the Exchange and other SROs had no 
direct jurisdiction. In each case, the conduct involved a pattern of 
disruptive quoting and trading activity indicative of manipulative 
layering \4\ or spoofing.\5\ The Exchange and other SROs were able to 
identify the disruptive quoting and trading activity in real-time or 
near real-time; nonetheless, in accordance with Exchange Rules and the 
Act, the Members responsible for such conduct or responsible for their 
customers' conduct were allowed to continue the disruptive quoting and 
trading activity on the Exchange and other exchanges during the 
entirety of the subsequent lengthy investigation and enforcement 
process. The Exchange believes that it should have the authority to 
initiate an expedited suspension proceeding in order to stop the 
behavior from continuing on the Exchange if a Member is engaging in or 
facilitating disruptive quoting and trading activity and the Member has 
received sufficient notice with an opportunity to respond, but such 
activity has not ceased.
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    \4\ ``Layering'' is a form of market manipulation in which 
multiple, non-bona fide limit orders are entered on one side of the 
market at various price levels in order to create the appearance of 
a change in the levels of supply and demand, thereby artificially 
moving the price of the security. An order is then executed on the 
opposite side of the market at the artificially created price, and 
the non-bona fide orders are cancelled.
    \5\ ``Spoofing'' is a form of market manipulation that involves 
the market manipulator placing non-bona fide orders that are 
intended to trigger some type of market movement and/or response 
from other market participants, from which the market manipulator 
might benefit by trading bona fide orders.
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    The following two examples are instructive on the Exchange's 
rationale for the proposed rule change.
    In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, 
Inc.) (the ``Firm'') and its CEO were barred from the industry for, 
among other things, supervisory violations related to a failure by the 
Firm to detect and prevent disruptive and allegedly manipulative 
trading activities, including layering, short sale violations, and 
anti-money laundering violations.\6\ The Firm's sole business was to 
provide trade execution services via a proprietary day trading platform 
and order management system to day traders located in foreign 
jurisdictions. Thus, the disruptive and allegedly manipulative trading 
activity introduced by the Firm to U.S. markets originated directly or 
indirectly from foreign clients of the Firm. The pattern of disruptive 
and allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008. Although 
the Firm and its principals were on notice of the disruptive and 
allegedly manipulative quoting and trading activity that was occurring, 
the Firm took little to no action to attempt to supervise or prevent 
such quoting and trading activity until at least 2009. Even when it put 
some controls in place, they were deficient and the pattern of 
disruptive and allegedly manipulative trading activity continued to 
occur. As noted above, the final resolution of the enforcement action 
to bar the Firm and its CEO from the industry was not concluded until 
2012, four years after the disruptive and allegedly manipulative 
trading activity was first identified.
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    \6\ See Biremis Corp. and Peter Beck, FINRA Letter of 
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
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    In September of 2012, Hold Brothers On-Line Investment Services, 
Inc. (the ``Firm'') settled a regulatory action in connection with the 
Firm's provision of a trading platform, trade software and trade 
execution, support and clearing services for day traders.\7\ Many 
traders using the Firm's services were located in foreign 
jurisdictions. The Firm ultimately settled the action with FINRA and 
several exchanges, including the Exchange, for a total monetary fine of 
$3.4 million. In a separate action, the Firm settled with the 
Commission for a monetary fine of $2.5 million.\8\ Among the alleged 
violations in the case were disruptive and allegedly manipulative 
quoting and trading activity, including spoofing, layering, wash 
trading, and pre-arranged trading. Through its conduct and insufficient 
procedures and controls, the Firm also allegedly committed anti-money 
laundering violations by failing to detect and report manipulative and 
suspicious trading activity. The Firm was alleged to have not only 
provided foreign traders with access to the U.S. markets to engage in 
such activities, but that its principals also owned and funded foreign 
subsidiaries that engaged in the disruptive and allegedly manipulative 
quoting and trading activity. Although the pattern of disruptive and 
allegedly manipulative quoting and trading activity was identified in 
2009, as noted above, the enforcement action was not concluded until 
2012. Thus, although disruptive and allegedly manipulative quoting and 
trading was promptly detected, it continued for several years.
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    \7\ See Hold Brothers On-Line Investment Services, LLC, FINRA 
Letter of Acceptance, Waiver and Consent No. 20100237710001, 
September 25, 2012.
    \8\ In the Matter of Hold Brothers On-Line Investment Services, 
LLC, Exchange Act Release No. 67924, September 25, 2012.
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    The Exchange also notes the current criminal proceedings that have 
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly 
manipulative trading activity, which included forms of layering and 
spoofing in the futures markets, has been linked as a contributing 
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
    The Exchange believes that the activities described in the cases 
above provide justification for the proposed rule change, which is 
described below. In addition, while the examples provided are related 
to the equities market, the Exchange believes that this type of conduct 
should be prohibited for all Exchange members, equities and options. 
The Exchange believes that these patterns of disruptive and allegedly 
manipulative quoting and trading activity need to be addressed and the 
product should not limit the action taken by the Exchange. For this 
reason, the Exchange now proposes a corresponding options rule.
Rule 9400--Expedited Client Suspension Proceeding
    The Exchange adopted Rule 9400 to set forth procedures for issuing 
suspension orders, immediately prohibiting a Member from conducting 
continued disruptive quoting and trading activity on the Exchange. 
Importantly, these procedures provide

[[Page 44368]]

the Exchange the authority to order a Member to cease and desist from 
providing access to the Exchange to a client of the Member that is 
conducting disruptive quoting and trading activity in violation of Rule 
2170. Paragraph (a) of Rule 9400, with the prior written authorization 
of the Chief Regulatory Officer (``CRO'') or such other senior officers 
as the CRO may designate, the Office of General Counsel or Regulatory 
Department of the Exchange (such departments generally referred to as 
the ``Exchange'' for purposes of Rule 9400) and may initiate an 
expedited suspension proceeding with respect to alleged violations of 
Rule 2170. Paragraph (a) also sets forth the requirements for notice 
and service of such notice pursuant to the Rule, including the required 
method of service and the content of notice.
    Paragraph (b) of Rule 9400 governs the appointment of a Hearing 
Panel as well as potential disqualification or recusal of Hearing 
Officers. The Exchange's Rules provide for a Hearing Officer to be 
recused in the event he or she has a conflict of interest or bias or 
other circumstances exist where his or her fairness might reasonably be 
questioned in accordance with Rules 9233(a). In addition to recusal 
initiated by such a Hearing Officer, a party to the proceeding will be 
permitted to file a motion to disqualify a Hearing Officer. However, 
due to the compressed schedule pursuant to which the process would 
operate under Rule 9400, the rule requires such motion to be filed no 
later than 5 days after the announcement of the Hearing Panel and the 
Exchange's brief in opposition to such motion would be required to be 
filed no later than 5 days after service thereof. Pursuant to existing 
Rule 9233(c), a motion for disqualification of a Hearing Officer shall 
be decided by the Chief Hearing Officer based on a prompt 
investigation. The applicable Hearing Officer shall remove himself or 
herself and request the Chief Executive Officer to reassign the hearing 
to another Hearing Officer such that the Hearing Panel still meets the 
compositional requirements described in Rule 9231(b). If the Chief 
Hearing Officer determines that the Respondent's grounds for 
disqualification are insufficient, it shall deny the Respondent's 
motion for disqualification by setting forth the reasons for the denial 
in writing and the Hearing Panel will proceed with the hearing.
    Under paragraph (c) of the Rule, the hearing would be held not 
later than 15 days after service of the notice initiating the 
suspension proceeding, unless otherwise extended by the Chairman of the 
Hearing Panel with the consent of the Parties for good cause shown. In 
the event of a recusal or disqualification of a Hearing Officer, the 
hearing shall be held not later than five days after a replacement 
Hearing Officer is appointed. Paragraph (c) also governs how the 
hearing is conducted, including the authority of Hearing Officers, 
witnesses, additional information that may be required by the Hearing 
Panel, the requirement that a transcript of the proceeding be created 
and details related to such transcript, and details regarding the 
creation and maintenance of the record of the proceeding. Paragraph (c) 
also states that if a Respondent fails to appear at a hearing for which 
it has notice, the allegations in the notice and accompanying 
declaration may be deemed admitted, and the Hearing Panel may issue a 
suspension order without further proceedings. Finally, if the Exchange 
fails to appear at a hearing for which it has notice, the Hearing Panel 
may order that the suspension proceeding be dismissed.
    Under paragraph (d) of the Rule, the Hearing Panel would be 
required to issue a written decision stating whether a suspension order 
would be imposed. The Hearing Panel would be required to issue the 
decision not later than 10 days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the Parties for good cause shown. The Rule 
states that a suspension order shall be imposed if the Hearing Panel 
finds by a preponderance of the evidence that the alleged violation 
specified in the notice has occurred and that the violative conduct or 
continuation thereof is likely to result in significant market 
disruption or other significant harm to investors.
    Paragraph (d) also describes the content, scope and form of a 
suspension order. A suspension order shall be limited to ordering a 
Respondent to cease and desist from violating Rule 2170 and/or to 
ordering a Respondent to cease and desist from providing access to the 
Exchange to a client of Respondent that is causing violations of Rule 
2170. Under the rule, a suspension order shall also set forth the 
alleged violation and the significant market disruption or other 
significant harm to investors that is likely to result without the 
issuance of an order. The order shall describe in reasonable detail the 
act or acts the Respondent is to take or refrain from taking, and 
suspend such Respondent unless and until such action is taken or 
refrained from. Finally, the order shall include the date and hour of 
its issuance. A suspension order would remain effective and enforceable 
unless modified, set aside, limited, or revoked pursuant to paragraph 
(e), as described below. Finally, paragraph (d) requires service of the 
Hearing Panel's decision and any suspension order consistent with other 
portions of the rule related to service.
    Paragraph (e) of Rule 9400 states that at any time after the 
Hearing Officers served the Respondent with a suspension order, a Party 
could apply to the Hearing Panel to have the order modified, set aside, 
limited, or revoked. If any part of a suspension order is modified, set 
aside, limited, or revoked, paragraph (e) of Rule 9400 provides the 
Hearing Panel discretion to leave the cease and desist part of the 
order in place. For example, if a suspension order suspends Respondent 
unless and until Respondent ceases and desists providing access to the 
Exchange to a client of Respondent, and after the order is entered the 
Respondent complies, the Hearing Panel is permitted to modify the order 
to lift the suspension portion of the order while keeping in place the 
cease and desist portion of the order. With its broad modification 
powers, the Hearing Panel also maintains the discretion to impose 
conditions upon the removal of a suspension--for example, the Hearing 
Panel could modify an order to lift the suspension portion of the order 
in the event a Respondent complies with the cease and desist portion of 
the order but additionally order that the suspension will be re-imposed 
if Respondent violates the cease and desist provisions of the modified 
order in the future. The Hearing Panel generally would be required to 
respond to the request in writing within 10 days after receipt of the 
request. An application to modify, set aside, limit or revoke a 
suspension order would not stay the effectiveness of the suspension 
order.
    Finally, paragraph (f) provides that sanctions issued under Rule 
9400 would constitute final and immediately effective disciplinary 
sanctions imposed by the Exchange, and that the right to have any 
action under the Rule reviewed by the Commission would be governed by 
Section 19 of the Act. The filing of an application for review would 
not stay the effectiveness of a suspension order unless the Commission 
otherwise ordered.
Rule 2170- Disruptive Quoting and Trading Activity Prohibited
    The Exchange currently has authority to prohibit and take action 
against manipulative trading activity, including disruptive quoting and 
trading activity, pursuant to its general market

[[Page 44369]]

manipulation rules, including Rules 2110, 2111, 2120, and 2170. The 
Exchange proposes to adopt a new rule at Chapter III, Section 16, which 
would more specifically define and prohibit disruptive options quoting 
and trading activity on the Exchange. As noted above, the Exchange also 
proposes to apply the proposed suspension rules to Chapter III, Section 
16.
    Proposed Chapter III, Section 16 would prohibit Members from 
engaging in or facilitating disruptive options quoting and trading 
activity on the Exchange, as described in proposed Chapter III, Section 
16(i) and (ii), including acting in concert with other persons to 
effect such activity. The Exchange believes that it is necessary to 
extend the prohibition to situations when persons are acting in concert 
to avoid a potential loophole where disruptive quoting and trading 
activity is simply split between several brokers or customers. The 
Exchange believes, that with respect to persons acting in concert 
perpetrating an abusive scheme, it is important that the Exchange have 
authority to act against the parties perpetrating the abusive scheme, 
whether it is one person or multiple persons.
    To provide proper context for the situations in which the Exchange 
proposes to utilize its authority, the Exchange believes it is 
necessary to describe the types of disruptive options quoting and 
trading activity that would cause the Exchange to use its authority. 
Accordingly, the Exchange proposes to adopt Chapter III, Section 16(i) 
and (ii) providing additional details regarding disruptive options 
quoting and trading activity. Proposed Chapter III, Section 16(i)(a) 
describes disruptive options quoting and trading activity containing 
many of the elements indicative of layering. It would describe 
disruptive options quoting and trading activity as a frequent pattern 
in which the following facts are present: (i) A party enters multiple 
limit orders on one side of the market at various price levels (the 
``Displayed Orders''); and (ii) following the entry of the Displayed 
Orders, the level of supply and demand for the security changes; and 
(iii) the party enters one or more orders on the opposite side of the 
market of the Displayed Orders (the ``Contra-Side Orders'') that are 
subsequently executed; and (iv) following the execution of the Contra-
Side Orders, the party cancels the Displayed Orders. Proposed Chapter 
III, Section 16(i)(b) describes disruptive options quoting and trading 
activity containing many of the elements indicative of spoofing and 
would describe disruptive quoting and trading activity as a frequent 
pattern in which the following facts are present: (i) A party narrows 
the spread for a security by placing an order inside the national best 
bid or offer; and (ii) the party then submits an order on the opposite 
side of the market that executes against another market participant 
that joined the new inside market established by the order described in 
proposed (b)(i) that narrowed the spread. The Exchange believes that 
the proposed descriptions of disruptive quoting and trading activity 
articulated in the rule are consistent with the activities that have 
been identified and described in the client access cases described 
above.\9\ The Exchange further believes that the proposed descriptions 
will provide Members with clear descriptions of disruptive options 
quoting and trading activity that will help them to avoid engaging in 
such activities or allowing their clients to engage in such activities.
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    \9\ As previously noted herein, while the examples noted in the 
Purpose Section of this 19b4 [sic] are related to the equities 
market, the Exchange believes that this type of conduct should be 
prohibited for all Exchange members, equities and options. The 
Exchange believes that these patterns of disruptive and allegedly 
manipulative quoting and trading activity need to be addressed and 
the product should not limit the action taken by the Exchange. For 
this reason, the Exchange now proposes a corresponding options rule.
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    The Exchange proposes to make clear in proposed Chapter III, 
Section 16(ii), unless otherwise indicated, the descriptions of 
disruptive options quoting and trading activity do not require the 
facts to occur in a specific order in order for the rule to apply. For 
instance, with respect to the pattern defined in proposed Chapter III, 
Section 16(i)(a) it is of no consequence whether a party first enters 
Displayed Orders and then Contra-side Orders or vice-versa. However, as 
proposed, supply and demand must change following the entry of the 
Displayed Orders. The Exchange also proposes to make clear that 
disruptive options quoting and trading activity includes a pattern or 
practice in which some portion of the disruptive options quoting and 
trading activity is conducted on the Exchange and the other portions of 
the disruptive options quoting and trading activity are conducted on 
one or more other exchanges. The Exchange believes that this authority 
is necessary to address market participants who would otherwise seek to 
avoid the prohibitions of the proposed Rule by spreading their activity 
amongst various execution venues. In sum, proposed Chapter III, Section 
16 coupled with Rule 9400 would provide the Exchange with authority to 
promptly act to prevent disruptive quoting and trading activity from 
continuing on the Exchange.
    Below is an example of how the proposed rule would operate.
    Assume that through its surveillance program, Exchange staff 
identifies a pattern of potentially disruptive options quoting and 
trading activity. After an initial investigation the Exchange would 
then contact the Member responsible for the orders that caused the 
activity to request an explanation of the activity as well as any 
additional relevant information, including the source of the activity. 
If the Exchange were to continue to see the same pattern from the same 
Member and the source of the activity is the same or has been 
previously identified as a frequent source of disruptive options 
quoting and trading activity then the Exchange could initiate an 
expedited suspension proceeding by serving notice on the Member that 
would include details regarding the alleged violations as well as the 
proposed sanction. In such a case the proposed sanction would likely be 
to order the Member to cease and desist providing access to the 
Exchange to the client that is responsible for the disruptive quoting 
and trading activity and to suspend such Member unless and until such 
action is taken.
    The Member would have the opportunity to be heard in front of a 
Hearing Panel at a hearing to be conducted within 15 days of the 
notice. If the Hearing Panel determined that the violation alleged in 
the notice did not occur or that the conduct or its continuation would 
not have the potential to result in significant market disruption or 
other significant harm to investors, then the Hearing Panel would 
dismiss the suspension order proceeding.
    If the Hearing Panel determined that the violation alleged in the 
notice did occur and that the conduct or its continuation is likely to 
result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would issue the order including the 
proposed sanction, ordering the Member to cease providing access to the 
client at issue and suspending such Member unless and until such action 
is taken. If such Member wished for the suspension to be lifted because 
the client ultimately responsible for the activity no longer would be 
provided access to the Exchange, then such Member could apply to the 
Hearing Panel to have the order modified, set aside, limited or 
revoked. The Exchange notes that the issuance of a suspension order 
would not alter the Exchange's ability to further investigate the 
matter and/or

[[Page 44370]]

later sanction the Member pursuant to the Exchange's standard 
disciplinary process for supervisory violations or other violations of 
Exchange rules or the Act.
    The Exchange reiterates that it already has broad authority to take 
action against a Member in the event that such Member is engaging in or 
facilitating disruptive or manipulative trading activity on the 
Exchange. For the reasons described above, and in light of recent cases 
like the client access cases described above, as well as other cases 
currently under investigation, the Exchange believes that it is equally 
important for the Exchange to have the authority to promptly initiate 
expedited suspension proceedings against any Member who has 
demonstrated a clear pattern or practice of disruptive options quoting 
and trading activity, as described above, and to take action including 
ordering such Member to terminate access to the Exchange to one or more 
of such Member's clients if such clients are responsible for the 
activity.
    The Exchange recognizes that its authority to issue a suspension 
order is a powerful measure that should be used very cautiously. 
Consequently, the rules have been designed to ensure that the 
proceedings are used to address only the most clear and serious types 
of disruptive quoting and trading activity and that the interests of 
Respondents are protected. For example, to ensure that proceedings are 
used appropriately and that the decision to initiate a proceeding is 
made only at the highest staff levels, the rules require the CRO or 
another senior officer of the Exchange to issue written authorization 
before the Exchange can institute an expedited suspension proceeding. 
In addition, the rule by its terms is limited to violations of Chapter 
III, Section 16, when necessary to protect investors, other Members and 
the Exchange. The Exchange will initiate disciplinary action for 
violations of Chapter III, Section 16, pursuant to Rule 9400. Further, 
the Exchange believes that the expedited suspension provisions 
described above that provide the opportunity to respond as well as a 
Hearing Panel determination prior to taking action will ensure that the 
Exchange would not utilize its authority in the absence of a clear 
pattern or practice of disruptive options quoting and trading activity.
    The Exchange also notes that that it may impose temporary 
restrictions upon the automated entry or updating of orders or quotes/
orders as the Exchange may determine to be necessary to protect the 
integrity of the Exchange's systems pursuant to Rule 4611(c).\10\ Also, 
pursuant to Rule 9555(a)(2) \11\ if a member, associated person, or 
other person cannot continue to have access to services offered by the 
Exchange or a member thereof with safety to investors, creditors, 
members, or the Exchange, the Exchange's Regulation Department staff 
may provide written notice to such member or person limiting or 
prohibiting access to services offered by the Exchange or a member 
thereof. This ability to impose a temporary restriction upon Members 
assists the Exchange in maintaining the integrity of the market and 
protecting investors and the public interest.
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    \10\ For example, such temporary restrictions may be necessary 
to address a system problem at a particular NOM Market Maker, NOM 
ECN or Order Entry Firm or at the Exchange, or an unexpected period 
of extremely high message traffic.
    \11\ See Rule 9555, entitled ``Failure to Meet the Eligibility 
or Qualification Standards or Prerequisites for Access to 
Services.''
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ in particular, in that the rules of the 
Exchange are designed to prevent fraudulent and manipulative acts and 
practices, 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. Pursuant to the proposal, the 
Exchange will have a mechanism to promptly initiate expedited 
suspension proceedings in the event the Exchange believes that it has 
sufficient proof that a violation of Rule 2170 has occurred and is 
ongoing.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Further, the Exchange believes that the proposal is consistent with 
Sections 6(b)(1) and 6(b)(6) of the Act,\14\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of the Commission and Exchange rules. The 
Exchange also believes that the proposal is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act because the proposal helps to strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where 
awaiting the conclusion of a full disciplinary proceeding is unsuitable 
in view of the potential harm to other Members and their customers. 
Also, the Exchange notes that if this type of conduct is allowed to 
continue on the Exchange, the Exchange's reputation could be harmed 
because it may appear to the public that the Exchange is not acting to 
address the behavior. The expedited process would enable the Exchange 
to address the behavior with greater speed.
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    \14\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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    As explained above, the Exchange notes that it has defined the 
prohibited disruptive quoting and trading activity by modifying the 
traditional definitions of layering and spoofing \15\ to eliminate an 
express intent element that would not be proven on an expedited basis 
and would instead require a thorough investigation into the activity. 
As noted throughout this filing, the Exchange believes it is necessary 
for the protection of investors to make such modifications in order to 
adopt an expedited process rather than allowing disruptive quoting and 
trading activity to occur for several years.
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    \15\ See supra, notes 4 and 5.
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    Through this proposal, the Exchange does not intend to modify the 
definitions of spoofing and layering that have generally been used by 
the Exchange and other regulators in connection with actions like those 
cited above. The Exchange believes that the pattern of disruptive and 
allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008 in the 
equities markets.\16\ The Exchange believes that this proposal will 
provide the Exchange with the necessary means to enforce against such 
behavior in an expedited manner while providing Members with the 
necessary due process. The Exchange believes that its proposal is 
consistent with the Act because it provides the Exchange with the 
ability 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 from such ongoing behavior.
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    \16\ See Section 3 [sic] herein, the Purpose section, for 
examples of conduct referred to herein.
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    Further, the Exchange believes that adopting a rule applicable to 
Options Participants is consistent with the Act because the Exchange 
believes that this type of behavior should be prohibited for all 
members, not just equities members. The type of product should not be 
the determining factor, rather the behavior which challenges the market 
structure is the primary concern for the Exchange. While this behavior 
may not be as prevalent on the options market

[[Page 44371]]

today, the Exchange does not believe that the possibility of such 
behavior in the future would not have the same market impact and 
thereby warrant an expedited process. The Exchange believes that 
treating all members, equities and options, in a uniform manner with 
respect to the type of disciplinary action that would be taken for 
violations of manipulative quoting and trading activity is consistent 
with the Act.
    The Exchange further believes that the proposal is consistent with 
Section 6(b)(7) of the Act,\17\ which requires that the rules of an 
exchange ``provide a fair procedure for the disciplining of members and 
persons associated with members . . . and the prohibition or limitation 
by the exchange of any person with respect to access to services 
offered by the exchange or a member thereof.'' Finally, the Exchange 
also believes the proposal is consistent with Sections 6(d)(1) and 
6(d)(2) of the Act,\18\ which require that the rules of an exchange 
with respect to a disciplinary proceeding or proceeding that would 
limit or prohibit access to or membership in the exchange require the 
exchange to: Provide adequate and specific notice of the charges 
brought against a member or person associated with a member, provide an 
opportunity to defend against such charges, keep a record, and provide 
details regarding the findings and applicable sanctions in the event a 
determination to impose a disciplinary sanction is made. The Exchange 
believes that each of these requirements is addressed by the notice and 
due process provisions included within Rule 9400. Importantly, as noted 
above, the Exchange will use the authority only in clear and egregious 
cases when necessary to protect investors, other Members and the 
Exchange, and in such cases, the Respondent will be afforded due 
process in connection with the suspension proceedings.
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    \17\ 15 U.S.C. 78f(b)(7).
    \18\ U.S.C. 78f(d)(1).
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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. To the contrary, the Exchange 
believes that each self-regulatory organization should be empowered to 
regulate trading occurring on its market consistent with the Act and 
without regard to competitive issues. The Exchange is requesting 
authority to take appropriate action if necessary for the protection of 
investors, other Members and the Exchange. The Exchange also believes 
that it is important for all exchanges to be able to take similar 
action to enforce their rules against manipulative conduct thereby 
leaving no exchange prey to such conduct.
    The Exchange does not believe that the proposed rule change imposes 
an undue burden on competition, rather this process will provide the 
Exchange with the necessary means to enforce against violations of 
manipulative quoting and trading activity in an expedited manner, while 
providing Members with the necessary due process. The Exchange believes 
that adopting a rule applicable to Options Participants does not impose 
an undue burden on competition because this type of behavior should be 
prohibited for all members, not just equities members. The Exchange's 
proposal would treat all members, equities and options, in a uniform 
manner with respect to the type of disciplinary action that would be 
taken for violations of manipulative quoting and trading activity.

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 \19\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \20\ 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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    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 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 proposal 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-2016-092 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-2016-092. 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 No. SR-NASDAQ-2016-092, and should be 
submitted on or before July 28, 2016.


[[Page 44372]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16035 Filed 7-6-16; 8:45 am]
BILLING CODE 8011-01-P


