
[Federal Register Volume 81, Number 188 (Wednesday, September 28, 2016)]
[Notices]
[Pages 66702-66705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23323]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78908; File No. SR-NASDAQ-2016-111]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Nasdaq Rules 4702 and 
4703

September 22, 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 September 13, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq Rules 4702, Order Types, and 
4703, Order Attributes, to change the way in which Post Only Orders 
interact with resting Non-Display orders and preventing the execution 
of midpoint pegged orders during a crossed market.
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange offers various Order Types \3\ and Order Attributes 
\4\ to help members trade effectively on behalf of investors and 
themselves. This proposal would modify the manner in which two of those 
order types, Non-Display and

[[Page 66703]]

Post Only, interact within Nasdaq's trading system.
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    \3\ See Exchange Rule 4702. The Exchange also proposes a minor 
technical correction to add the word ``price'' after the word 
``displayed'' in the second line of the second paragraph of Rule 
4702(b)(4)(B).
    \4\ See Exchange Rule 4703.
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    Nasdaq's Non-Display Orders, described in Rule 4702(b)(3), help 
members minimize market impact when trading in larger-than-average 
size. For example, institutions often use Non-Display Orders that use 
pegging at the midpoint (Midpoint Peg Order) \5\ of the National Best 
Bid and Offer (NBBO) to reduce market impact because a midpoint 
execution does not indicate a price movement direction, as opposed to 
buying at the offer or selling at the bid (sometimes referred to as 
``crossing the spread'') which may publicly indicate the direction of 
the stock price.
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    \5\ See Exchange Rule 4702(b)(3)(C).
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    The Exchange also offers Post Only Orders, described in Rule 
4702(b)(4), which members, often market makers, use to rest liquidity 
on Nasdaq's Order Book. Resting displayed liquidity is essential to 
price formation and order interaction, two indicators of healthy and 
orderly markets. Nasdaq introduced Post Only Orders \6\ to enable and 
encourage this valuable behavior. A Post Only buy (sell) order entered 
at a price that is at least $0.01 higher (lower) than a resting sell 
(buy) order will execute, thereby providing price improvement that 
exceeds the foregone rebate for liquidity provision and fee for 
removing liquidity. If a Post Only buy (sell) order is entered at a 
price equal to a resting sell (buy) order, the buy (sell) order is 
repriced one minimum price increment (MPV), generally $0.01 \7\ lower 
(higher) than the resting sell (buy) order's price.
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    \6\ See Post Only order Factsheet: http://www.nasdaqtrader.com/content/ProductsServices/Trading/postonly_factsheet.pdf.
    \7\ Securities priced at or above $1 are quoted in $0.01 
increments, below $1, they can be quoted in $0.0001 increments. Post 
Only behavior is slightly different below $1 because the fees and 
economics involved in the execution are distinct from those above 
$1. See Exchange Rule 4702(b)(4)(A). Fees for securities priced at 
or above $1 are assessed on a per-share basis; fees for securities 
priced below $1 are assessed as a percentage of transaction value. 
Compare Rules 7018 (a) and (b). In both cases, the Exchange system 
is programmed to analyze the price improvement offered and to 
execute only where permitted under its rules.
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    This repricing function, sometimes referred to as ``price-
sliding,'' often occurs when a liquidity provider seeking to tighten 
the bid/offer spread on Nasdaq encounters a Non-Display Order on the 
opposite side of market from the Post Only Order. When this occurs, the 
displayed spread on Nasdaq may become wider than on competing exchanges 
therefore reducing market quality and the likelihood of execution on 
Nasdaq. In addition, the member entering the Post Only Order learns 
through the repricing action both that there is a Non-Display Order 
resting on the book and also the price at which the Non-Display Order 
is resting. The Exchange believes that this interaction is inefficient 
and detrimental to investors, to members, and to the market.
    Accordingly, the Exchange proposes two changes to the manner in 
which certain Post Only Orders respond to certain Non-Display Orders 
resting on the opposite side of the market. In all other instances, 
there will be no change. For example, Post-Only Orders will continue to 
execute against resting Non-Display Orders provided the execution 
results in minimum price improvement of $0.01 for the member entering 
the Post Only Order, as they do today.
    First, a Post-Only Order that is entered with a price equal to a 
resting Non-Display Order will be posted at its limit price (or its 
adjusted price if applicable),\8\ rather than being re-priced as it is 
today. This allows the Post Only Order to lock the resting Non-Display 
Order.\9\ Both the displayed Post Only order and the resting Non-
Display order will remain available for execution at the locking price. 
In this way, neither order is disadvantaged; the Exchange Bid/Offer 
spread is tightened; and no signal is sent to the member that entered 
the Post Only Order. In this scenario, efficacy is maintained or 
enhanced for both the Post Only Order user and the Non-Display Order 
user compared to today. For example, under the current rules if a 
Participant entered a Post-Only Order to buy at $11.02, the Best Offer 
\10\ was $11.04, and there was a Non-Displayed Order on the Nasdaq Book 
to sell at $11.02, the Post-Only Order would be ranked and displayed at 
$11.01. Using the above scenario, the Exchange is proposing to instead 
rank and display the Post-Only Order to buy at its limit price of 
$11.02.
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    \8\ If a Post-Only Order is received at a price that would lock 
or cross a Protected Quotations [sic], its price will be adjusted in 
the same manner as a Price to Comply order (if it is not 
Attributable) or a Price to Display Order (if it is Attributable). 
See Rules 4702(b)(1) and 4702(b)(4)(A).
    \9\ The Exchange believes that this condition is consistent with 
the Regulation NMS prohibition on locked and crossed markets because 
the Exchange will not be displaying a locked market.
    \10\ The term ``Best Offer'' is defined in Exchange Rule 
4701(j).
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    Second, the Exchange also proposes to modify processing when a Post 
Only Order interacts with a Non-Display Order that is a Midpoint Peg 
Order. Specifically, when a Post Only buy (sell) order is priced higher 
(lower) than a resting Midpoint Peg Order but where the difference is 
less than $0.01, the Post Only Order will nonetheless be posted at its 
limit price. This proposal benefits investors and members because it 
results in a tighter Bid/Offer spread. Moreover, because the Post Only 
order is not re-priced relative to the resting Midpoint Peg order, as 
it is today, there is no information leakage. Additionally, the member 
entering the Midpoint Peg Order benefits because the new midpoint based 
on the new NBBO would now be a better price for the seller. Midpoint 
Peg orders are either cancelled or re-adjusted based on NBBO changes 
depending on the protocol used by the member to enter the Midpoint Peg 
Order.\11\ For example, under the current rules if the NBBO is $10.11 x 
$10.16 and a Participant enters a Midpoint Peg Order (which, as stated 
above, is Non-Displayed) to buy 200 shares with a limit price of 
$10.15, the Midpoint Peg Order would post to the book at $10.135. If 
thereafter a Post-Only Order to sell 200 shares at $10.13 is entered, 
the Post-Only Order would post and display at $10.14. Under the 
proposed change and using the example above, the incoming Post-Only 
Order to sell 200 shares at $10.13 would post and display at $10.13 and 
the Midpoint Peg Order would either be adjusted to the new midpoint 
($10.125 [sic]) based on the change in the NBBO due to the Post-Only 
Order being displayed (the NBBO is now $10.11 x $10.14 [sic] due to the 
Post-Only Order posting and displaying at $10.14 [sic]) or cancelled, 
depending on the protocol used to enter the Midpoint Peg order.
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    \11\ See Exchange Rule 4703(d).
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    In addition, the Exchange proposes to discontinue executing 
midpoint pegged orders when the NBBO is crossed. Today, the Exchange 
executes midpoint pegged orders when the NBBO is locked by executing at 
the locking price and when the NBBO is crossed by executing at the 
midpoint of the crossed price. Based upon feedback from members and the 
practice of other exchanges,\12\ the Exchange has determined that its 
current practice of executing midpoint pegged orders during such 
crossed markets produces sub-optimal execution prices for members and 
investors. The midpoint of a crossed market is not a clear and accurate 
indication of a valid price, nor is it indicative of a fair and orderly 
market. The better result is to simply not execute midpoint orders 
during crossed markets. To accomplish this, the Exchange will program 
the trading system to respond to the creation of a crossed NBBO by 
cancelling existing midpoint pegged orders and rejecting the entry of 
new

[[Page 66704]]

midpoint pegged orders.\13\ After such order cancellation or rejection, 
members can resubmit their orders at their discretion without 
limitation. Accordingly, the Exchange proposes to modify the rule 
language describing the processing of Orders with the midpoint pegging 
attribute as well as Midpoint Peg Post Only Orders, which are described 
in Rules 4703(d) and 4702(b)(5).
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    \12\ See, e.g., BATS Rule 11.9(c)(9) (no midpoint execution 
during crossed market); NYSE Arca Rule 7.31(d)(4) (no midpoint 
execution when the market is locked or crossed).
    \13\ Similarly, in the absence of an NBBO, the Exchange will 
either reject the entry of new Midpoint Peg Post Only Orders or 
cancel any such existing orders before they execute. The Exchange is 
proposing to add words ``cancelled or'' prior to ``rejected'' in 
Rule 4702(b)(5)(A).
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    As set forth below, the Exchange believes the proposed changes will 
benefit investors and members by addressing certain market 
inefficiencies that exist on Nasdaq, and by improving Nasdaq's 
competitive position against other exchanges that already offer similar 
processing of resting and non-displayed orders.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\15\ in particular, in that 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 in several ways.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    First, the proposed changes will benefit investors and members by 
tightening bid/offer spreads, thereby enhancing execution quality on 
the Exchange. Second, members entering Post Only Orders will be able to 
execute liquidity-providing strategies more efficiently. Third, the 
proposed changes will reduce the signaling created today by the 
interaction of Post Only and Non-Display Order, and thereby minimize 
the market impact of larger orders. Fourth, the cancellation or 
rejection of midpoint pegged orders when the NBBO is crossed will avoid 
mispriced executions and result in higher overall execution quality for 
members.
    The Exchange believes the proposed changes have no detrimental 
impact on any member or class of members, or on users of the Post Only 
or Non-Display Order types or on users of other order types offered by 
the Exchange. First, the use of Exchange Order types and attributes is 
voluntary, in that no member is required to use any specific Order type 
or attribute or even to use any Exchange Order type or attribute or any 
Exchange functionality at all. If an Exchange member believes for any 
reason that the proposed rule change will be detrimental, that 
perceived detriment can be avoided by choosing not to enter or interact 
with the Order types modified by this proposed rule change. Second, the 
Exchange believes that the changes proposed herein will not result in 
any diminution of market quality (execution price, effective spread, 
fill rate, etc.) for any member entering or interacting with one of the 
Order types modified by this proposed rule change.

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 the proposed rule changes are pro-competitive for several 
reasons. First, the proposed functionality is designed to compete with 
exchanges, including BATS and NYSE Arca, which already offer order 
types that behave similarly to how the Exchanges proposes Post Only and 
Non-Display Orders behave in the future. Second, the Exchange believes 
that the proposed rule change will make the Exchange a more competitive 
execution venue by creating tighter bid/offer spreads and by enhancing 
execution quality (i.e., achieving increased price improvement, 
reducing effective spreads, and increasing execution fill rates). 
Third, the Exchange proposes to offer the same functionality to all 
members, thereby eliminating potential competitive burden or 
differential treatment.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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-2016-111 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2016-111. 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-2016-111 and should 
be submitted on or before October 19, 2016.


[[Page 66705]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-23323 Filed 9-27-16; 8:45 am]
 BILLING CODE 8011-01-P


