
[Federal Register Volume 81, Number 134 (Wednesday, July 13, 2016)]
[Notices]
[Pages 45315-45320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16493]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78251; File No. SR-NASDAQ-2016-093]


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

July 7, 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 June 24, 2016, The NASDAQ Stock Market LLC (``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``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 to adopt rules under Rule 4770 to implement 
the quoting and trading provisions of the Plan to Implement a Tick Size 
Pilot Program submitted to the Commission pursuant to Rule 608 of 
Regulation NMS \3\ under the Act (the ``Plan'').\4\ The proposed rule 
change is substantially similar to proposed rule changes recently 
approved or published by the Commission by New York Stock Exchange LLC 
to adopt NYSE Rules 67(a) and 67(c)-(e), which also implemented the 
quoting and trading provisions of the Plan.\5\
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    \3\ 17 CFR 242.608.
    \4\ See Securities and Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27513 (File No. 4-657) (``Tick Plan Approval Order''). 
See also Securities and Exchange Act Release No. 76382 (November 6, 
2015) (File No. 4-657), 80 FR 70284 (File No. 4-657) (November 13, 
2015), which extended the pilot period commencement date from May 6, 
2015 to October 3, 2016.
    \5\ See Securities Exchange Act Release No. 76229 (October 22, 
2015), 80 FR 66065 (October 28, 2015) (SR-NYSE-2015-46), as amended 
by Partial Amendments No. 1 and No. 2 to the Quoting & Trading Rules 
Proposal. See Securities Exchange Act Release No. 77703 (April 25, 
2016), 81 FR 25725 (April 29, 2016) (SR-NYSE-2015-46).
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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.

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

1. Purpose
    The Exchange proposes to establish rules to require its members to 
comply with the requirements of the Plan, which is designed to study 
and assess the impact of increment conventions on the liquidity and 
trading of the common stocks of small capitalization companies. The 
Exchange proposes changes to its rules for a two-year pilot period that 
coincides with the pilot period for the Plan, which is currently 
scheduled as a two year pilot to begin on October 3, 2016.
Background
    On August 25, 2014, NYSE Group, Inc., on behalf of Bats BZX 
Exchange, Inc. (f/k/a BATS Exchange, Inc.), Bats BYX Exchange, Inc. (f/
k/a BATS Y-Exchange, Inc.), Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., the Exchange[sic], Financial 
Industry Regulatory Authority, Inc. (``FINRA''), NASDAQ OMX BX, Inc., 
NASDAQ OMX PHLX LLC, New York Stock Exchange LLC, the Exchange and NYSE 
Arca, Inc., and the NYSE MKT LLC, (collectively ``Participants''), 
filed with the Commission, pursuant to Section 11A of the Act \6\ and 
Rule 608 of Regulation NMS thereunder, the Plan to Implement a Tick 
Size Pilot Program.\7\ The Participants filed the Plan to comply with 
an order issued by the Commission on June 24, 2014 (the ``June 2014 
Order'').\8\ The Plan \9\ was published for

[[Page 45316]]

comment in the Federal Register on November 7, 2014,\10\ and approved 
by the Commission, as modified, on May 6, 2015.\11\
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    \6\ 15 U.S.C. 78k-1.
    \7\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \8\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \9\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \10\ See Securities and Exchange Act Release No. 73511 (November 
3, 2014), 79 FR 66423 (File No. 4-657) (Tick Plan Filing).
    \11\ See Tick Plan Approval Order, supra note 4. See also 
Securities Exchange Act Release No. 77277 (March 3, 2016), 81 FR 
12162 (March 8, 2016) (File No. 4-657), which amended the Plan to 
add National Stock Exchange, Inc. as a Participant.
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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. The Commission plans to use the Tick Size 
Pilot Program to assess whether wider tick sizes enhance the market 
quality of Pilot Securities for the benefit of issuers and investors. 
Each Participant is required to comply with, and to enforce compliance 
by its members, as applicable, with the provisions of the Plan.
    On October 9, 2015, the Operating Committee approved the Exchange's 
proposed rules as model Participant rules that would require compliance 
by a Participant's members with the provisions of the Plan, as 
applicable, and would establish written policies and procedures 
reasonably designed to comply with applicable quoting and trading 
requirements specified in the Plan.\12\ As described more fully below, 
the proposed rules would require members to comply with the Plan and 
provide for the widening of quoting and trading increments for Pilot 
Securities, consistent with the Plan.
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    \12\ The Operating Committee is required under Section III(C)(2) 
of the Plan to ``monitor the procedures established pursuant to the 
Plan and advise Participants with respect to any deficiencies, 
problems, or recommendations as the Operating Committee may deem 
appropriate.'' The Operating Committee is also required to 
``establish specifications and procedures for the implementation and 
operation of the Plan that are consistent with the provisions of the 
Plan.''
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    The Plan 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 Plan will consist of a control group 
of approximately 1,400 Pilot Securities and three test groups with 400 
Pilot Securities in each selected by a stratified sampling.\13\ 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. 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.\14\ 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 exception, and a negotiated trade exception.\15\ Pilot 
Securities in the third test group (``Test Group Three'') will be 
subject to the same terms as Test Group Two and also will be subject to 
the ``Trade-at'' requirement to prevent price matching by a person not 
displaying at a price of a Trading Center's ``Best Protected Bid'' or 
``Best Protected Offer,'' unless an enumerated exception applies.\16\ 
In addition to the exceptions provided under Test Group Two, an 
exception for Block Size orders and exceptions that closely resemble 
those under Rule 611 of Regulation NMS \17\ will apply to the Trade-at 
requirement.
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    \13\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \14\ See Section VI(B) of the Plan. Pilot Securities in Test 
Group One will be subject to a midpoint exception and a retail 
investor exception.
    \15\ See Section VI(C) of the Plan.
    \16\ See Section VI(D) of the Plan.
    \17\ 17 CFR 242.611.
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    The Plan also contains requirements for the collection and 
transmission of data to the Commission and the public. A variety of 
data generated during the Plan will be released publicly on an 
aggregated basis to assist in analyzing the impact of wider tick sizes 
on smaller capitalization stocks.\18\
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    \18\ See Section VII of the Plan.
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Proposed Rules 4770(a) and (c)
    The Plan requires the Exchange 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.\19\ Accordingly, the Exchange is proposing new Rule 4770(a) to 
require its members to comply with the quoting and trading provisions 
of the Plan. The proposed Rules are also designed to ensure the 
Exchange's compliance with the Plan.
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    \19\ The Exchange was also required by the Plan to develop 
appropriate policies and procedures that provide for data collection 
and reporting to the Commission of data described in Appendixes B 
and C of the Plan. See Securities Exchange Act Release No. 77456 
(March 28, 2016), 81 FR 18925 (April 1, 2016) (SR-NASDAQ-2016-43).
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    Proposed paragraph (a)(1) of new Rule 4770 would establish the 
following defined terms:
     ``Plan'' means the Tick Size Pilot Plan submitted to the 
Commission pursuant to Rule 608(a)(3) of Regulation NMS under the Act.
     ``Pilot Test Groups'' means the three test groups 
established under the Plan, consisting of 400 Pilot Securities each, 
which satisfy the respective criteria established by the Plan for each 
such test group.
     Trade-at Intermarket Sweep Order'' \20\ would mean a limit 
order for a Pilot Security that meets the following requirements:
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    \20\ The Plan defines a Trade-at Intermarket Sweep Order 
(``ISO'') as a limit order for a Pilot Security that, when routed to 
a Trading Center, is identified as an ISO, and simultaneous with the 
routing of the limit order identified as an ISO, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid (in the case of a limit 
order to sell) or the full displayed size of any protected offer (in 
the case of a limit order to buy) for the Pilot Security with a 
price that is equal to the limit price of the limit order identified 
as an ISO. These additional routed orders also must be marked as 
ISOs. See Plan, Section I(MM). Since the Plan allows (i) an order 
that is identified as an ISO to be executed at the price of a 
Protected Quotation (see Plan, Section VI(D)(8) and proposed Rule 
4770(c)(3)(D)(iii)i.) and (ii) an order to execute at the price of a 
Protected Quotation that ``is executed by a trading center that 
simultaneously routed Trade-at ISO to execute against the full 
displayed size of the Protected Quotation that was trade at'' (see 
Plan, Section VI(D)(9) and proposed Rule 4770(c)(3)(D)(iii)j.)), the 
Exchange proposes to clarify the use of an ISO in connection with 
the Trade-at requirement by adopting, as part of proposed Rule 
4770(a)(1), a comprehensive definition of ``Trade-at ISO.'' As set 
forth in the Plan and as noted above, the definition of a Trade-at 
ISO used in the Plan does not distinguish ISOs that are compliant 
with Rule 611 or Regulation NMS from ISOs that are compliant with 
Trade-at. The Exchange therefore proposes the separate definition of 
Trade-at ISO contained in proposed Rule 4770(a). The Exchange 
believes that this proposed definition will further clarify to 
recipients of ISOs in Test Group Three securities whether the ISO 
satisfies the requirements of Rule 611 of Regulation NMS or Trade-
at.
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    (i) When routed to a Trading Center, the limit order is identified 
as a Trade-at Intermarket Sweep Order; and
    (ii) Simultaneously with the routing of the limit order identified 
as a Trade-at Intermarket Sweep Order, one or more additional limit 
orders, as necessary, are routed to execute against the full size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order to 
buy, for the Pilot Security with a price that is better than or equal 
to the limit price of the limit order identified as a Trade-at 
Intermarket Sweep Order. These additional routed orders also must be 
marked as Trade-at Intermarket Sweep Orders.
     Paragraph (a)(1)(E) would provide that all capitalized 
terms not otherwise defined in this rule shall have the meanings set 
forth in the Plan, Regulation NMS under the Act, or Exchange rules, as 
applicable.
    Proposed Paragraph (a)(2) would state that the Exchange is a 
Participant in,

[[Page 45317]]

and subject to the applicable requirements of, the Plan; proposed 
Paragraph (a)(3) would require members to establish, maintain and 
enforce written policies and procedures that are reasonably designed to 
comply with the applicable requirements of the Plan, which would allow 
the Exchange to enforce compliance by its members with the provisions 
of the Plan, as required pursuant to Section II(B) of the Plan.
    In addition, Paragraph (a)(4) would provide that Exchange systems 
would not display, quote or trade in violation of the applicable 
quoting and trading requirements for a Pilot Security specified in the 
Plan and this proposed rule, unless such quotation or transaction is 
specifically exempted under the Plan.\21\
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    \21\ The Exchange is still evaluating its internal policies and 
procedures to ensure compliance with the Plan, and plans to 
separately propose rules that would address violations of the Plan.
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    The Exchange also proposes to add Rule 4770(a)(5) to provide for 
the treatment of Pilot Securities that drop below a $1.00 value during 
the Pilot Period.\22\ The Exchange proposes that if the price of a 
Pilot Security drops below $1.00 during regular trading on any given 
business day, such Pilot Security would continue to be subject to the 
Plan and the requirements described below that necessitate members to 
comply with the specific quoting and trading obligations for each 
respective Pilot Test Group under the Plan, and would continue to trade 
in accordance with the proposed rules below as if the price of the 
Pilot Security had not dropped below $1.00. However, if the Closing 
Price of a Pilot Security on any given business day is below $1.00, 
such Pilot Security would be moved out of its respective Pilot Test 
Group into the control group (which consists of Pilot Securities not 
placed into a Pilot Test Group), and may then be quoted and traded at 
any price increment that is currently permitted by Exchange rules for 
the remainder of the Pilot Period. Notwithstanding anything contained 
herein to the contrary, the Exchange proposes that, at all times during 
the Pilot Period, Pilot Securities (whether in the control group or any 
Pilot Test Group) would continue to be subject to the data collection 
rules, which are enumerated in Rule 4770(b).
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    \22\ New York Stock Exchange LLC, on behalf of the Participants, 
submitted a letter to Commission requesting exemption from certain 
provisions of the Plan related to quoting and trading. See letter 
from Elizabeth K. King, NYSE, to Brent J. Fields, Secretary, 
Commission, dated October 14, 2015 (the ``October Exemption 
Request''). FINRA, also on behalf of the Plan Participants, 
submitted a separate letter to Commission requesting additional 
exemptions from certain provisions of the Plan related to quoting 
and trading. See letter from Marcia E. Asquith, Senior Vice 
President and Corporate Secretary, FINRA, to Robert W. Errett, 
Deputy Secretary, Commission, dated February 23, 2016 (the 
``February Exemption Request,'' and together with the October 
Exemption Request, the ``Exemption Request Letters''). The 
Commission, pursuant to its authority under Rule 608(e) of 
Regulation NMS, granted New York Stock Exchange LLC a limited 
exemption from the requirement to comply with certain provisions of 
the Plan as specified in the Exemption Request Letters and noted 
herein. See letter from David Shillman, Associate Director, Division 
of Trading and Markets, Commission to Sherry Sandler, Associate 
General Counsel, New York Stock Exchange LLC, dated April 25, 2016 
(the ``Exemption Letter''). The Exchange is seeking the same 
exemptions as requested in the Exemption Request Letters, including 
without limitation, an exemption relating to proposed Rule 
4770(a)(5).
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    The Exchange proposes Rules 4770(c)(1)-(3), which would require 
members to comply with the specific quoting and trading obligations for 
each Pilot Test Group under the Plan. With regard to Pilot Securities 
in Test Group One, proposed Rule 4770(c)(1) would provide that no 
member may display, rank, or accept from any person any displayable or 
non-displayable bids or offers, orders, or indications of interest in 
increments other than $0.05. However, orders priced to trade at the 
midpoint of the National Best Bid and National Best Offer (``NBBO'') or 
Best Protected Bid and Best Protected Offer (``PBBO'') and orders 
entered in a Participant-operated retail liquidity program \23\ may be 
ranked and accepted in increments of less than $0.05. Pilot Securities 
in Test Group One may continue to trade at any price increment that is 
currently permitted by Rule 4701(k).\24\
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    \23\ The Exchange notes that it does not currently operate a 
retail liquidity program, but has elected to include rule text taken 
from the plan concerning such programs and Retail Investor Orders 
under Rule 4770(c) to keep the rule text consistent with the Plan.
    \24\ Rule 4701(k) describes the minimum price variation for 
quoting and entry of orders in equity securities listed on the 
Exchange or a national securities exchange other than the Exchange.
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    With regard to Pilot Securities in Test Group Two, proposed Rule 
4770(c)(2)(A) would provide that such Pilot Securities would be subject 
to all of the same quoting requirements as described above for Pilot 
Securities in Test Group One, along with the applicable quoting 
exceptions. In addition, proposed Rule 4770(c)(2)(B) would provide 
that, absent one of the listed exceptions in proposed 4770(c)(2)(C) 
enumerated below, no member may execute orders in any Pilot Security in 
Test Group Two in price increments other than $0.05. The $0.05 trading 
increment would apply to all trades, including Brokered Cross Trades.
    Paragraph (2)(C) would set forth further requirements for Pilot 
Securities in Test Group Two. Specifically, members trading Pilot 
Securities in Test Group Two would be allowed to trade in increments 
less than $0.05 under the following circumstances:
    (i) Trading may occur at the midpoint between the NBBO or PBBO;
    (ii) Retail Investor Orders may be provided with price improvement 
that is at least $0.005 better than the PBBO;
    (iii) Negotiated Trades may trade in increments less than $0.05; 
and
    (iv) Execution of a customer order to comply with Rule 5320A \25\ 
following the execution of a proprietary trade by the member at an 
increment other than $0.05, where such proprietary trade was 
permissible pursuant to an exception under the Plan.\26\
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    \25\ Rule 5320A is the Exchange's Prohibition Against Trading 
Ahead of Customer Orders rule and incorporates by reference FINRA 
Rule 5320, which states:
    (a) Except as provided herein, a member that accepts and holds 
an order in an equity security from its own customer or a customer 
of another broker-dealer without immediately executing the order is 
prohibited from trading that security on the same side of the market 
for its own account at a price that would satisfy the customer 
order, unless it immediately thereafter executes the customer order 
up to the size and at the same or better price at which it traded 
for its own account.
    (b) A member must have a written methodology in place governing 
the execution and priority of all pending orders that is consistent 
with the requirements of this Rule and Rule 5310. A member also must 
ensure that this methodology is consistently applied.
    \26\ The Exchange proposes to add this exemption to permit 
members to fill a customer order in a Pilot Security at a non-nickel 
increment to comply with Rule 5320A under limited circumstances. 
Specifically, the exception would allow the execution of a customer 
order following a proprietary trade by the member at an increment 
other than $0.05 in the same security, on the same side and at the 
same price as (or within the prescribed amount of ) a customer order 
owed a fill pursuant to Rule 5320A, where the triggering proprietary 
trade was permissible pursuant to an exception under the Plan. The 
Commission granted New York Stock Exchange LLC an exemption from 
Rule 608(c) related to this provision. See Exemption Letter, supra 
note 22. The Exchange is seeking the same exemptions as requested in 
the Exemption Request Letters. The Exchange believes such an 
exception best facilitates the ability of members to continue to 
protect customer orders while retaining the flexibility to engage in 
proprietary trades that comply with an exception to the Plan.
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    Paragraph (3)(A)-(3)(C) would set forth the requirements for Pilot 
Securities in Test Group Three. Members quoting or trading such Pilot 
Securities would be subject to all of the same quoting and trading 
requirements as described above for Pilot Securities in Test Group Two, 
including the quoting and trading exceptions applicable to Pilot 
Securities in Test Group Two. In addition, proposed Paragraph (3)(D) 
would provide for an additional prohibition on Pilot Securities in Test 
Group Three referred to as the ``Trade-

[[Page 45318]]

at Prohibition.'' \27\ Paragraph (3)(D)(ii) would provide that, absent 
one of the listed exceptions in proposed Rule 4770(c)(3)(D)(iii) 
enumerated below, no member may execute a sell order for a Pilot 
Security in Test Group Three at the price of a Protected Bid or execute 
a buy order for a Pilot Security in Test Group Three at the price of a 
Protected Offer.
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    \27\ Proposed 4770(c)(3)(D)(i) would define the ``Trade-at 
Prohibition'' to mean the prohibition against executions by a 
Trading Center of a sell order for a Pilot Security at the price of 
a Protected Bid or the execution of a buy order for a Pilot Security 
at the price of a Protected Offer during regular trading hours.
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    Proposed Rule 4770(c)(3)(D)(iii) would allow members to execute a 
sell order for a Pilot Security in Test Group Three at the price of a 
Protected Bid or execute a buy order for a Pilot Security in Test Group 
Three at the price of a Protected Offer if any of the following 
circumstances exist:
    a. The order is executed as agent or riskless principal by an 
independent trading unit, as defined under Rule 200(f) of Regulation 
SHO,\28\ of a Trading Center within a member that has a displayed 
quotation as agent or riskless principal, via either a processor or an 
SRO Quotation Feed, at a price equal to the traded-at Protected 
Quotation, that was displayed before the order was received,\29\ but 
only up to the full displayed size of that independent trading unit's 
previously displayed quote; \30\
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    \28\ The Exchange is proposing that, for proposed Rules 
4770(c)(3)(D)(iii)a. and b., a Trading Center operated by a broker-
dealer would mean an independent trading unit, as defined under Rule 
200(f) of Regulation SHO, within such broker-dealer. See 17 CFR 
242.200.
    Independent trading unit aggregation is available if traders in 
an aggregation unit pursue only the particular trading objective(s) 
or strategy(s) of that aggregation unit and do not coordinate that 
strategy with any other aggregation unit. Therefore, a Trading 
Center cannot rely on quotations displayed by that broker dealer 
from a different independent trading unit. As an example, an agency 
desk of a broker-dealer cannot rely on the quotation of a 
proprietary desk in a separate independent trading unit at that same 
broker-dealer.
    \29\ The Exchange is proposing to adopt this limitation to 
ensure that a Trading Center does not display a quotation after the 
time of order receipt solely for the purpose of trading at the price 
of a protected quotation without routing to that protected 
quotation.
    \30\ This proposed exception to Trade-at would allow a Trading 
Center to execute an order at the Protected Quotation in the same 
capacity in which it has displayed a quotation at a price equal to 
the Protected Quotation and up to the displayed size of such 
displayed quotation.
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    b. The order is executed by an independent trading unit, as defined 
under Rule 200(f) of Regulation SHO, of a Trading Center within a 
member that has a displayed quotation for the account of that Trading 
Center on a principal (excluding riskless principal \31\) basis, via 
either a processor or an SRO Quotation Feed, at a price equal to the 
traded-at Protected Quotation, that was displayed before the order was 
received, but only up to the full displayed size of that independent 
unit's previously displayed quote; \32\
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    \31\ As described above, proposed Rule 4770(c)(3)(D)(iii)a. 
would establish the circumstances in which a Trading Center 
displaying an order as riskless principal would be permitted to 
Trade-at the Protected Quotation. Accordingly, the Exchange proposes 
that proposed Rule 4770(c)(3)(D)(iii)b. would exclude such 
circumstances.
    \32\ The display exceptions to Trade-at set forth in proposed 
Rules 4770(c)(3)(D)(iii)a. and b. would not permit a broker-dealer 
to trade on the basis of interest it is not responsible for 
displaying. In particular, a broker-dealer that matches orders in 
the over-the-counter market shall be deemed to have ``executed'' 
such orders as a Trading Center for purposes of proposed Rule 4770. 
Accordingly, if a broker-dealer is not displaying a quotation at a 
price equal to the Protected Quotation, it could not submit matched 
trades to an alternative trading center (``ATS'') that was 
displaying on an agency basis the quotation of another ATS 
subscriber. However, a broker-dealer that is displaying, as 
principal, via either a processor or an SRO Quotation Feed, a buy 
order at the protected bid, could internalize a customer sell order 
up to its displayed size. The display exceptions would not permit a 
non-displayed Trading Center to submit matched trades to an ATS that 
was displaying on an agency basis the quotation of another ATS 
subscriber and confirmed that a broker-dealer would not be permitted 
to trade on the basis of interest that it is not responsible for 
displaying.
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    c. The order is of Block Size \33\ at the time of origin and may 
not be:
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    \33\ ``Block Size'' is defined in the Plan as an order (1) of at 
least 5,000 shares or (2) for a quantity of stock having a market 
value of at least $100,000.
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    A. An aggregation of non-block orders;
    B. broken into orders smaller than Block Size prior to submitting 
the order to a Trading Center for execution; or
    C. executed on multiple Trading Centers; \34\
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    \34\ Once a Block Size order or portion of such Block Size order 
is routed from one Trading Center to another Trading Center in 
compliance with Rule 611 of Regulation NMS, the Block Size order 
would not lose the Trade-at exemption provided under proposed Rule 
4770(c)(3)(D)(iii)c. For example, if an exchange has a Protected Bid 
of 3,000 shares, with 2,000 shares in reserve, and receives a 5,000 
share order to sell, the exchange would be able to execute the 
entire 5,000 share order without having to route to an away market 
at any other Protected Bid at the same price. If, however, that 
exchange only has 1,000 shares in reserve, the entire order would 
not be able to be executed on that exchange, and the exchange would 
only be able to execute 3,000 shares and route the rest to away 
markets at other Protected Bids at the same price, before executing 
the 1,000 shares in reserve.
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    d. The order is a Retail Investor Order executed with at least 
$0.005 price improvement;
    e. The order is executed when the Trading Center displaying the 
Protected Quotation that was traded at was experiencing a failure, 
material delay, or malfunction of its systems or equipment;
    f. The order is executed as part of a transaction that was not a 
``regular way'' contract;
    g. The order is executed as part of a single-priced opening, 
reopening, or closing transaction on the Exchange;
    h. The order is executed when a Protected Bid was priced higher 
than a Protected Offer in the Pilot Security in Test Group Three;
    i. The order is identified as a Trade-at Intermarket Sweep Order; 
\35\
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    \35\ In connection with the definition of a Trade-at ISO 
proposed in Rule 4770(a)(1)(D), this exception refers to the ISO 
that is received by a Trading Center.
    The Exchange proposed an exemption to the Trade-at Prohibition 
for Trade-at ISOs to clarify that an ISO that is received by a 
Trading Center (and which could form the basis of an execution at 
the price of a Protected Quotation pursuant to Section VI(D)(8) of 
the Plan), is identified as a Trade-at ISO. Depending on whether 
Rule 611 of Regulation NMS or the Trade-at requirement applies, an 
ISO may mean that the sender of the ISO has swept better-priced 
Protected Quotations, so that the recipient of that ISO may trade 
through the price of the Protected Quotation (Rule 611 of Regulation 
NMS), or it could mean that the sender of the ISO has swept 
Protected Quotations at the same price that it wishes to execute at 
(in addition to any better-priced quotations), so the recipient of 
that ISO may trade at the price of the Protected Quotation (Trade-
at). Given that the meaning of an ISO may differ under Rule 611 of 
Regulation NMS and Trade-at, the Exchange proposed an exemption to 
the Trade-at Prohibition for Trade-at ISOs so that the recipient of 
an ISO in a Test Group Three security would know, upon receipt of 
that ISO, that the Trading Center that sent the ISO had already 
executed against the full size of displayed quotations at that 
price, e.g., the recipient of that ISO could permissibly trade at 
the price of the Protected Quotation.
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    j. The order is executed by a Trading Center that simultaneously 
routed Trade-at Intermarket Sweep Orders to execute against the full 
displayed size of the Protected Quotation that was traded at; \36\
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    \36\ In connection with the definition of a Trade-at ISO 
proposed in Rule 4770(a)(1)(D), this exception refers to the Trading 
Center that routed the ISO.
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    k. The order is executed as part of a Negotiated Trade;
    l. The order is executed when the Trading Center displaying the 
Protected Quotation that was traded at had displayed, within one second 
prior to execution of the transaction that constituted the Trade-at, a 
Best Protected Bid or Best Protected Offer, as applicable, for the 
Pilot Security in Test Group Three with a price that was inferior to 
the price of the Trade-at transaction;
    m. The order is executed by a Trading Center which, at the time of 
order receipt, the Trading Center had guaranteed an execution at no 
worse than a specified price (a ``stopped order''), where:
    A. The stopped order was for the account of a customer;

[[Page 45319]]

    B. The customer agreed to the specified price on an order-by-order 
basis; and
    C. The price of the Trade-at transaction was, for a stopped buy 
order, equal to or less than the National Best Bid in the Pilot 
Security in Test Group Three at the time of execution or, for a stopped 
sell order, equal to or greater than the National Best Offer in the 
Pilot Security in Test Group Three at the time of execution, as long as 
such order is priced at an acceptable increment; \37\
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    \37\ The stopped order exemption in Rule 611 of Regulation NMS 
applies where ``[t]he price of the trade-through transaction was, 
for a stopped buy order, lower than the national best bid in the NMS 
stock at the time of execution or, for a stopped sell order, higher 
than the national best offer in the NMS stock at the time of 
execution'' (see 17 CFR 242.611(b)(9)). The Trade-at stopped order 
exception applies where ``the price of the Trade-at transaction was, 
for a stopped buy order, equal to the national best bid in the Pilot 
Security at the time of execution or, for a stopped sell order, 
equal to the national best offer in the Pilot Security at the time 
of execution'' (see Plan, Section VI(D)(12)).
    To illustrate the application of the stopped order exemption as 
it currently operates under Rule 611 of Regulation NMS and as it is 
currently proposed for Trade-at, assume the National Best Bid is 
$10.00 and another protected quote is at $9.95. Under Rule 611 of 
Regulation NMS, a stopped order to buy can be filled at $9.95 and 
the firm does not have to send an ISO to access the protected quote 
at $10.00 since the price of the stopped order must be lower than 
the National Best Bid. For the stopped order to also be executed at 
$9.95 and satisfy the Trade-at requirements, the Trade-at exception 
would have to be revised to allow an order to execute at the price 
of a protected quote which, in this case, could be $9.95.
    Based on the fact that a stopped order would be treated 
differently under the Rule 611 of Regulation NMS exception than 
under the Trade-at exception in the Plan, the Exchange believes that 
it is appropriate to amend the Trade-at stopped order exception in 
the Plan to ensure that the application of this exception would 
produce a consistent result under both Regulation NMS and the Plan. 
Therefore, the Exchange proposes in this proposed Rule 
4770(c)(3)(D)(iii)m, to allow a transaction to satisfy the Trade-at 
requirement if the stopped order price, for a stopped buy order, is 
equal to or less than the National Best Bid, and for a stopped sell 
order, is equal to or greater than the National Best Offer, as long 
as such order is priced at an acceptable increment. The Commission 
granted New York Stock Exchange LLC an exemption from Rule 608(c) 
related to this provision. See Exemption Letter, supra note 22. The 
Exchange is seeking the same exemptions as requested in the 
Exemption Request Letters.
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    n. The order is for a fractional share of a Pilot Security in Test 
Group Three, provided that such fractional share order was not the 
result of breaking an order for one or more whole shares of a Pilot 
Security in Test Group Three into orders for fractional shares or was 
not otherwise effected to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan; or
    o. The order is to correct a bona fide error, which is recorded by 
the Trading Center in its error account.\38\ A bona fide error is 
defined as:
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    \38\ The exceptions to the Trade-at requirement set forth in the 
Plan and in the Exchange's proposed Rule 4770(c)(3)(D)(iii) are, in 
part, based on the exceptions to the trade-through requirement set 
forth in Rule 611 of Regulation NMS, including exceptions for an 
order that is executed as part of a transaction that was not a 
``regular way'' contract, and an order that is executed as part of a 
single-priced opening, reopening, or closing transaction by the 
Trading Center (see 17 CFR 242.611(b)(2) and (b)(3)). Following the 
adoption of Rule 611 of Regulation NMS and its exceptions, the 
Commission issued exemptive relief that created exceptions from Rule 
611 of Regulation NMS for certain error correction transactions. See 
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR 
32926 (June 14, 2007); Securities Exchange Act Release No. 55883 
(June 8, 2007), 72 FR 32927 (June 14, 2007). The Exchange has 
determined that it is appropriate to incorporate this additional 
exception to the Trade-at Prohibition, as this exception is equally 
applicable in the Trade-at context.
    Accordingly, the Exchange is proposing to exempt certain 
transactions to correct bona fide errors in the execution of 
customer orders from the Trade-at Prohibition, subject to the 
conditions set forth by the SEC's order exempting these transactions 
from Rule 611 of Regulation NMS. The Commission granted New York 
Stock Exchange LLC an exemption from Rule 608(c) related to this 
provision. See Exemption Letter, supra note 22. The Exchange is 
seeking the same exemptions as requested in the Exemption Request 
Letters.
    As with the corresponding exception under Rule 611 of Regulation 
NMS, the bona fide error would have to be evidenced by objective 
facts and circumstances, the Trading Center would have to maintain 
documentation of such facts and circumstances and record the 
transaction in its error account. To avail itself of the exemption, 
the Trading Center would have to establish, maintain, and enforce 
written policies and procedures reasonably designed to address the 
occurrence of errors and, in the event of an error, the use and 
terms of a transaction to correct the error in compliance with this 
exemption. Finally, the Trading Center would have to regularly 
surveil to ascertain the effectiveness of its policies and 
procedures to address errors and transactions to correct errors and 
take prompt action to remedy deficiencies in such policies and 
procedures. See Securities Exchange Act Release No. 55884 (June 8, 
2007), 72 FR 32926 (June 14, 2007).
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    A. The inaccurate conveyance or execution of any term of an order 
including, but not limited to, price, number of shares or other unit of 
trading; identification of the security; identification of the account 
for which securities are purchased or sold; lost or otherwise misplaced 
order tickets; short sales that were instead sold long or vice versa; 
or the execution of an order on the wrong side of a market;
    B. The unauthorized or unintended purchase, sale, or allocation of 
securities, or the failure to follow specific client instructions;
    C. The incorrect entry of data into relevant systems, including 
reliance on incorrect cash positions, withdrawals, or securities 
positions reflected in an account; or
    D. A delay, outage, or failure of a communication system used to 
transmit market data prices or to facilitate the delivery or execution 
of an order.
    Finally, Proposed Rule 4770(c)(3)(D)(iv) would prevent members from 
breaking an order into smaller orders or otherwise effecting or 
executing an order to evade the requirements of the Trade-at 
Prohibition or any other provisions of the Plan.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\39\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\40\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
Exchange believes that the proposed rule change is consistent with the 
Act because it ensures that the Exchange and its members would be in 
compliance with a Plan approved by the Commission pursuant to an order 
issued by the Commission in reliance on Section 11A of the Act.\41\ 
Such approved Plan gives the Exchange authority 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 believes that the proposed rule 
change is consistent with the authority granted to it by the Plan to 
establish specifications and procedures for the implementation and 
operation of the Plan that are consistent with the provisions of the 
Plan. Likewise, the Exchange believes that the proposed rule change 
provides interpretations of the Plan that are consistent with the Act, 
in general, and furthers the objectives of the Act, in particular.
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    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
    \41\ 15 U.S.C. 78k-1.
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    Furthermore, the Exchange is a Participant under the Plan and 
subject, itself, to the provisions of the Plan. The proposed rule 
change ensures that the Exchange's systems would not display or execute 
trading interests outside the requirements specified in such Plan. The 
proposal would also help allow market participants to continue to trade 
NMS Stocks within quoting and trading requirements that are in 
compliance with the Plan, with certainty on how certain orders and 
trading interests would be treated. This, in turn, will help encourage 
market participants to continue to provide liquidity in the 
marketplace.

[[Page 45320]]

    Because the Plan supports further examination and analysis on the 
impact of tick sizes on the trading and liquidity of the securities of 
small capitalization companies, and the Commission believes that 
altering tick sizes could result in significant market-wide benefits 
and improvements to liquidity and capital formation, adopting rules 
that enforce compliance by its members with the provisions of the Plan 
would help promote liquidity in the marketplace and perfect the 
mechanism of a free and open market and national market system.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed changes are 
being made to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to comply with the trading and 
quoting requirements specified in the Plan, of which other equities 
exchanges are also Participants. Other competing national securities 
exchanges are subject to the same trading and quoting requirements 
specified in the Plan. Therefore, the proposed changes would not impose 
any burden on competition, while providing certainty of treatment and 
execution of trading interests on the Exchange to market participants 
in NMS Stocks that are acting in compliance with the requirements 
specified in the Plan.

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 \42\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\43\
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    \42\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \43\ 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 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-2016-093 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2016-093. 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-2016-093, and should 
be submitted on or before August 3, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-16493 Filed 7-12-16; 8:45 am]
 BILLING CODE 8011-01-P


