
[Federal Register Volume 81, Number 168 (Tuesday, August 30, 2016)]
[Notices]
[Pages 59672-59674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20736]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78667; File Nos. SR-BX-2016-037; SR-NASDAQ-2016-067; 
SR-Phlx-2016-58)


Self-Regulatory Organizations; NASDAQ BX, Inc.; The Nasdaq Stock 
Market LLC; NASDAQ PHLX LLC; Notice of Filing of Amendments No. 1 and 
Order Granting Accelerated Approval of Proposed Rule Changes, as 
Modified by Amendments No. 1, To Adopt Limit Order Protections

August 24, 2016.

I. Introduction

    On June 24, 2016, NASDAQ BX, Inc. (``BX''), The Nasdaq Stock Market 
LLC (``Nasdaq''), and NASDAQ PHLX LLC (``Phlx,'' and together with BX 
and Nasdaq, ``Exchanges'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule changes to adopt Limit Order Protections 
(``LOP''). The proposed rule changes were published for comment in the 
Federal Register on July 13, 2016.\3\ On July 28, 2016, each of the 
Exchanges filed an Amendment No. 1 to its proposed rule change 
(collectively ``Amendments No. 1'').\4\ The Commission received no 
comment letters on the proposals. The Commission is publishing this 
notice to solicit comments on the Exchanges' proposals, as modified by 
Amendments No. 1, from interested persons and is approving the 
Exchanges' proposals, as modified by Amendments No. 1, on an 
accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 78244 (July 7, 
2016), 81 FR 45320 (``BX Notice''); 78246 (July 7, 2016), 81 FR 
45332 (``Nasdaq Notice''); and 78245 (July 7, 2016), 81 FR 45337 
(``Phlx Notice'').
    \4\ Each of the Exchanges specified in its Amendment No. 1 that 
LOP would not apply if there is no established LOP Reference Price, 
or if the National Best Bid, when used as the LOP Reference Price, 
is equal to or less than $0.50. In addition, in its Amendment No. 1, 
Nasdaq clarified that it reserves the ability to temporarily disable 
LOP for certain securities in the event of extraordinary market 
conditions and explained the process for temporarily disabling LOP. 
Nasdaq also clarified that LOP would not be operational for orders 
designated for the re-opening cross, and further explained the 
existing protections for the Nasdaq opening, re-opening, and closing 
crosses and initial public offerings. Amendment No. 1 to the BX 
filing is available at https://www.sec.gov/comments/sr-bx-2016-037/bx2016037-1.pdf. Amendment No. 1 to the Nasdaq filing is available 
at https://www.sec.gov/comments/sr-nasdaq-2016-067/nasdaq2016067-1.pdf (``Nasdaq Amendment No. 1''). Amendment No. 1 to the Phlx 
filing is available at https://www.sec.gov/comments/sr-phlx-2016-58/phlx201658-1.pdf.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Changes, as Modified by Amendments 
No. 1

    Each of the Exchanges proposes to adopt LOP, which is a new 
mandatory feature designed to prevent certain Limit Orders at prices 
outside of pre-set standard limits (``LOP Limit'') from being accepted 
by the System.\5\
---------------------------------------------------------------------------

    \5\ See proposed BX Rule 4757(d); proposed Nasdaq Rule 4757(c); 
and proposed NASDAQ OMX PSX (``PSX'') Rule 3307(f).
---------------------------------------------------------------------------

    As proposed, LOP would apply to all Quotes and Orders, including 
any modified Orders,\6\ but would not apply to Market Orders, Market 
Maker Peg Orders, and Intermarket Sweep Orders (``ISOs'').\7\ According 
to the Exchanges, Market Maker Peg Orders are designed to assist Market 
Makers with meeting their quoting obligations, and Market Makers have 
more sophisticated infrastructures than other market participants and 
are able to manage their risk, particularly with respect to quoting, 
using tools that may not be available to other market participants.\8\ 
Moreover, according to the Exchanges, the ISO designation on an order 
presumes that the market participant has satisfied its obligation to 
route to all protected quotes with a price that is superior to the 
limit price of the ISO.\9\
---------------------------------------------------------------------------

    \6\ The Exchanges state that if an order is modified, LOP would 
review the order anew and, if LOP is triggered, the modification 
would not take effect and the original order would be rejected. See 
BX Notice, supra note 3, at n.5; Nasdaq Notice, supra note 3, at 
n.4; and Phlx Notice, supra note 3, at n.4.
    \7\ See proposed BX Rule 4757(d)(i); proposed Nasdaq Rule 
4757(c)(i); and proposed PSX Rule 3307(f)(i).
    \8\ See BX Notice, supra note 3, at 45321; Nasdaq Notice, supra 
note 3, at 45333; and Phlx Notice, supra note 3, at 45338.
    \9\ See BX Notice, supra note 3, at 45321; Nasdaq Notice, supra 
note 3, at 45333; and Phlx Notice, supra note 3, at 45338. See also 
BX Rule 4703(j); Nasdaq Rule 4703(j); and PSX Rule 3301B(j) 
(discussing ISOs).
---------------------------------------------------------------------------

    As proposed, LOP would be operational each trading day but would 
not be operational during trading halts and pauses.\10\ On Nasdaq, LOP 
also would not be operational for orders designated for the opening, 
re-opening, and closing crosses and initial public offerings.\11\ 
According to Nasdaq, the opening, re-opening, closing, and initial 
public offering processes already have their own price protections, and 
these processes involve certain price discovery features that are 
important in arriving at the best price.\12\
---------------------------------------------------------------------------

    \10\ See proposed BX Rule 4757(d)(i); proposed Nasdaq Rule 
4757(c)(i); and proposed PSX Rule 3307(f)(i).
    \11\ See proposed Nasdaq Rule 4757(c)(i) and Nasdaq Amendment 
No. 1, supra note 4.
    \12\ See Nasdaq Amendment No. 1, supra note 4.
---------------------------------------------------------------------------

    As proposed, LOP would reject incoming Limit Orders that exceed the 
LOP Reference Threshold.\13\ The LOP Reference Threshold for buy orders 
would be the LOP Reference Price (i.e., the current National Best 
Offer) plus the applicable LOP Limit and the LOP Reference Threshold 
for sell orders would be the LOP Reference Price (i.e., the current 
National Best Bid) minus the applicable LOP Limit.\14\ The LOP Limit 
would be the greater of 10% of the LOP Reference Price or $0.50 for all 
securities across all trading sessions.\15\ LOP would not apply if 
there is no established LOP Reference Price (e.g., there is a one-sided 
quote), or if the National Best Bid, when used as the

[[Page 59673]]

LOP Reference Price, is equal to or less than $0.50.\16\
---------------------------------------------------------------------------

    \13\ Specifically, a buy Limit Order would be rejected if the 
price of the Limit Order is greater than the LOP Reference Threshold 
and a sell Limit Order would be rejected if the price of the Limit 
Order is less than the LOP Reference Threshold. See proposed BX Rule 
4757(d)(v); proposed Nasdaq Rule 4757(c)(v); and proposed PSX Rule 
3307(f)(v).
    \14\ See proposed BX Rule 4757(d)(iii)-(iv); proposed Nasdaq 
Rule 4757(c)(iii)-(iv); and proposed PSX Rule 3307(f)(iii)-(iv).
    \15\ See proposed BX Rule 4757(d)(ii); proposed Nasdaq Rule 
4757(c)(ii); and proposed PSX Rule 3307(f)(ii).
    \16\ See proposed BX Rule 4757(d)(i); proposed Nasdaq Rule 
4757(c)(i); and proposed PSX Rule 3307(f)(i). See also Amendments 
No. 1, supra note 4.
---------------------------------------------------------------------------

    LOP would be applicable on all protocols available on each of the 
Exchanges.\17\ While each of the Exchanges intends to apply LOP system-
wide, each reserves the ability to temporarily disable LOP for certain 
securities in the event of extraordinary market conditions in a certain 
symbol.\18\
---------------------------------------------------------------------------

    \17\ See BX Notice, supra note 3, at 45321; Nasdaq Notice, supra 
note 3, at 45333; and Phlx Notice, supra note 3, at 45338.
    \18\ Each of the Exchanges states that if LOP is temporarily 
disabled for a particular symbol, it would immediately notify market 
participants by sending an Equities Trader Alert. It would re-enable 
LOP as soon as is reasonably practicable and send an updated alert 
to notify participants that LOP was enabled. See BX Notice, supra 
note 3, at 45321; Nasdaq Amendment No. 1, supra note 4; and Phlx 
Notice, supra note 3, at 45338.
---------------------------------------------------------------------------

    Each of the Exchanges proposes to implement LOP within ninety days 
of the approval of its proposal and will issue an Equities Trader Alert 
in advance to inform market participants of the implementation 
date.\19\
---------------------------------------------------------------------------

    \19\ See BX Notice, supra note 3, at 45321; Nasdaq Notice, supra 
note 3, at 45333; and Phlx Notice, supra note 3, at 45338. For a 
more detailed description of the proposed rule changes, see BX 
Notice, Nasdaq Notice, and Phlx Notice, supra note 3 and Amendments 
No. 1, supra note 4. See also proposed BX Rule 4757(d); proposed 
Nasdaq Rule 4757(c); and proposed PSX Rule 3307(f).
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    The Commission finds that the proposed rule changes, as modified by 
Amendments No. 1, are consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\20\ Specifically, the Commission finds that the 
proposals are consistent with Section 6(b)(5) of the Act,\21\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \20\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the LOP mechanism will help the 
Exchanges to identify and reject mispriced Limit Orders, which will 
help prevent the execution of Limit Orders at unintended and 
potentially erroneous prices. The Commission also believes that the LOP 
mechanism will be specifically tailored to address the Limit Orders are 
not already subject to price protection mechanisms or other risk 
mitigation mechanisms.\22\
---------------------------------------------------------------------------

    \22\ For example, as noted above, Market Makers on the Exchanges 
have tools to manage their risks with respect to quoting, and 
Nasdaq's opening, re-opening, closing, and initial public offering 
processes already have their own price protections. See supra notes 
8 and 12 and accompanying text.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule changes, as modified by Amendments No. 1, are consistent with 
Section 6(b)(5) of the Act \23\ and the rules and regulations 
thereunder applicable to national securities exchanges.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendments No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendments No. 1 are 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 Numbers SR-BX-2016-037, SR-NASDAQ-2016-067, and SR-Phlx-2016-58 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 Numbers SR-BX-2016-037, SR-NASDAQ-
2016-067, and SR-Phlx-2016-58. These file numbers 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 submissions, all 
subsequent amendments, all written statements with respect to the 
proposed rule changes that are filed with the Commission, and all 
written communications relating to the proposed rule changes 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 filings also will be available for inspection and copying 
at the principal offices of the Exchanges. 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 Numbers SR-BX-2016-037, SR-NASDAQ-2016-067, and 
SR-Phlx-2016-58 and should be submitted on or before September 20, 
2016.

V. Accelerated Approval of Proposed Rule Changes, as Modified by 
Amendments No. 1

    The Commission finds good cause to approve the proposed rule 
changes, as modified by Amendments No. 1, prior to the thirtieth day 
after the date of publication of Amendments No. 1 in the Federal 
Register. As described above,\24\ the amendments provided more clarity 
to the proposals by stating that LOP would not apply if the National 
Best Bid, when used as the LOP Reference Price, is equal to or less 
than $0.50.\25\ In addition, Nasdaq specified that its LOP would not be 
operational for orders designated for the re-opening cross,\26\ and 
provided additional information regarding the existing protections for 
the Nasdaq opening, re-opening, and closing crosses and initial public 
offerings. Finally, Nasdaq clarified that, same as BX and Phlx, it 
would have the ability to temporarily disable LOP under certain 
circumstances.\27\ The Commission believes that the amendments provided 
additional specificity and clarity, and provided consistency between 
the three proposals. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\28\ to approve the

[[Page 59674]]

proposed rule changes, as modified by Amendments No. 1, on an 
accelerated basis.
---------------------------------------------------------------------------

    \24\ See supra note 4.
    \25\ The Commission notes that, in the original filings, each of 
the Exchanges stated that LOP would not apply ``if the LOP Reference 
Price is less than the greater of 10% or $0.50.'' See BX Notice, 
supra note 3, at n.8; Nasdaq Notice, supra note 3, at n.8; and Phlx 
Notice, supra note 3, at n.7.
    \26\ The Commission notes that Nasdaq's original filing stated 
that LOP is not operational during trading halts or pauses. See 
proposed Nasdaq Rule 4757(c)(i).
    \27\ BX's and Phlx's ability to temporarily disable LOP and 
their processes for temporarily disabling LOP were described in 
their original filings. See BX Notice, supra note 3, at 45321 and 
Phlx Notice, supra note 3, at 45338.
    \28\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule changes (SR-BX-2016-037; SR-NASDAQ-
2016-067; SR-Phlx-2016-58), as modified by Amendments No. 1, be, and 
hereby are, approved on an accelerated basis.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20736 Filed 8-29-16; 8:45 am]
 BILLING CODE 8011-01-P


