
[Federal Register Volume 82, Number 19 (Tuesday, January 31, 2017)]
[Notices]
[Pages 8888-8890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02001]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79876; File No. SR-NASDAQ-2016-131]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Granting Approval of Proposed Rule Change, as Modified by Amendment 
Nos. 2 and 3, To Enhance the Reopening Auction Process Following a 
Trading Halt Declared Pursuant to the Plan To Address Extraordinary 
Market Volatility

January 25, 2017.

I. Introduction

    On October 13, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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\ a 
proposed rule change related to the Exchange's re-opening process 
following a trading halt declared pursuant to the National Market 
System Plan to Address Extraordinary Market Volatility (``Plan''). The 
proposed rule change was published for comment in the Federal Register 
on November 1, 2016.\3\ On December 5, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change. On December 14, 2016, the 
Commission extended the time period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule change 
to January 30, 2017.\4\ On December 21, 2016, the Exchange withdrew 
Amendment No. 1 and filed Amendment No. 2 to the proposed rule change. 
On January 19, 2017, the Exchange filed Amendment No. 3 to the proposed 
rule change.\5\ The Commission received no comments on the proposed 
rule change. This order approves the proposed rule change, as modified 
by Amendment Nos. 2 and 3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79158 (October 26, 
2016), 81 FR 75879 (``Notice'').
    \4\ See Securities Exchange Act Release No. 79551, 81 FR 92885 
(December 20, 2016).
    \5\ In Amendment No. 2, the Exchange proposed to use the Auction 
Reference Price to determine whether a security subject to a Trading 
Pause is priced at $3 or less, which would determine the method of 
calculating the Auction Collars. The Exchange also made a conforming 
change to Nasdaq Rule 4754(b)(6) relating to Trading Pauses that 
exist at or after 3:50 p.m. In Amendment No. 3, the Exchange 
proposed to implement the proposed rule change in the third quarter 
of 2017, following the Commission's approval of the Twelfth 
Amendment to the Plan. The Exchange also explained that this 
implementation is contingent on the Securities Information 
Processors successfully implementing changes to their systems to 
allow for the new re-opening process, and the other Primary Listing 
Exchanges gaining approval of their related filings and their 
ability to implement the changes concurrent with Nasdaq. Because 
Amendment Nos. 2 and 3 do not materially alter the substance of the 
proposed rule change or raise unique or novel regulatory issues, 
they are not subject to notice and comment. Both amendments are 
available at: https://www.sec.gov/comments/sr-nasdaq-2016-131/nasdaq2016131.shtml.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 2 and 3

    In conjunction with the Twelfth Amendment to the Plan,\6\ the 
Exchange proposes to revise its re-opening process following a trading 
halt declared pursuant to the Plan (``Trading Pause'') and to make 
related changes.
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    \6\ See Securities Exchange Act Release No. 79845 (January 19, 
2017) (File No. 4-631).
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Auction Reference Price and Auction Collar for the Re-Opening Process 
Following a Trading Pause

    The Exchange proposes to establish an ``Auction Reference Price'' 
and an ``Auction Collar'' for the re-opening process following a 
Trading Pause. Specifically, for a Limit Down triggered pause, the 
Auction Reference Price would be the Lower Band price of the LULD Band 
in place at the time the Trading Pause was triggered.\7\ For a Limit Up 
triggered pause, the Auction Reference Price would be the Upper Band 
price of the LULD Band in place at the time the Trading Pause was 
triggered.\8\ With respect to Auction Collars, for a Limit Down 
triggered pause, the lower Auction Collar price would be derived by 
subtracting 5% of the Auction Reference Price, rounded to the nearest 
minimum price increment, or in the case of securities with an Auction 
Reference Price of $3 or less, $0.15, from the Auction Reference Price, 
and the upper Auction Collar price would be the Upper Band price of the 
LULD Band in place at the time the Trading Pause was triggered.\9\ For 
a Limit Up triggered pause, the upper Auction Collar price would be 
derived by adding 5% of the Auction Reference Price, rounded to the 
nearest minimum price increment, or in the case of securities with an 
Auction Reference Price of $3 or less, $0.15, to the Auction Reference 
Price, and the lower Auction Collar price would be the Lower Band price 
of the LULD Band in place at the time the Trading Pause was 
triggered.\10\
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    \7\ See proposed Nasdaq Rule 4120(c)(10)(A)(i)(a).
    \8\ See proposed Nasdaq Rule 4120(c)(10)(A)(i)(b). The proposed 
definition of Auction Reference Price for a Trading Pause is 
designed to be consistent across listing exchanges.
    \9\ See proposed Nasdaq Rule 4120(c)(10)(A)(ii)(a).
    \10\ See proposed Nasdaq Rule 4120(c)(10)(A)(ii)(b). The 
proposed Auction Collars for a Trading Pause are designed to be 
consistent across listing exchanges.
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Extension of Re-Opening Time and Expansion of Auction Collars

    As proposed, for any security listed on the Exchange, prior to 
terminating a Trading Pause, there would be a 5-minute ``Initial 
Display Only Period'' during which market participants may enter 
quotations and orders in that security in Nasdaq systems.\11\ At the 
conclusion of the Initial Display Only Period, the security would be 
released for trading unless, at the end of the Initial Display Only 
Period, the Exchange detects an order imbalance in the security.\12\ In 
that case, the Exchange would extend the Display Only Period for an 
additional 5-minute period

[[Page 8889]]

(``Extended Display Only Period'') and the Auction Collars would be 
adjusted.\13\ Specifically, If the Display Only Period is extended 
because the calculated price at which the security would be released 
for trading is below the lower Auction Collar price or all sell market 
orders would not be executed in the cross, then the new lower Auction 
Collar price would be derived by subtracting 5% of the initial Auction 
Reference Price, which was rounded to the nearest minimum price 
increment, or in the case of securities with an Auction Reference Price 
of $3 or less, $0.15, from the previous lower Auction Collar price, and 
the upper Auction Collar price would not be changed.\14\ If the Display 
Only Period is extended because the calculated price at which the 
security would be released for trading is above the upper Auction 
Collar price or all buy market orders would not be executed in the 
cross, then the new upper Auction Collar price would be derived by 
adding 5% of the initial Auction Reference Price, which was rounded to 
the nearest minimum price increment, or in the case of securities with 
an Auction Reference Price of $3 or less, $0.15, to the previous upper 
Auction Collar price, and the lower Auction Collar price would not be 
changed.\15\
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    \11\ See proposed Nasdaq Rule 4120(c)(10). The proposed rule 
would also provide that the Trading Pause shall be terminated when 
Nasdaq releases the security for trading. See id. The Exchange 
proposes a conforming change in Nasdaq Rule 4120(c)(7)(A).
    \12\ See proposed Nasdaq Rule 4120(c)(10)(B). According to 
proposed Nasdaq Rule 4120(c)(10)(E), upon completion of the cross 
calculation, an order imbalance shall be established as follows: (i) 
The calculated price at which the security would be released for 
trading is above (below) the upper (lower) Auction Collar price 
calculated under paragraphs (A), (B), or (C) of Nasdaq Rule 
4120(c)(10); or (ii) all market orders would not be executed in the 
cross.
    \13\ See proposed Nasdaq Rule 4120(c)(10)(B).
    \14\ See proposed Nasdaq Rule 4120(c)(10)(B)(i).
    \15\ See proposed Nasdaq Rule 4120(c)(10)(B)(ii).
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    At the conclusion of the Extended Display Only Period, the security 
would be released for trading unless, at the end of the Extended 
Display Only Period, the Exchange detects an order imbalance in the 
security.\16\ In that case, the Exchange would further extend the 
Display Only Period and continue to adjust the Auction Collar prices 
every five minutes in the manner described in proposed Nasdaq Rule 
4120(c)(10)(B) until the security is released for trading.\17\ With 
respect to these additional extensions, the Exchange would release the 
security for trading at the first point there is no order 
imbalance.\18\
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    \16\ See proposed Nasdaq Rule 4120(c)(10)(C).
    \17\ See id.
    \18\ See id. The proposed extensions and widening of the Auction 
Collars are designed to be consistent across listing exchanges.
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    As proposed, if a Trading Pause for a security exists at or after 
3:50 p.m., the Exchange would conduct a LULD Closing Cross pursuant to 
Nasdaq Rule 4754(b)(6).\19\
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    \19\ See proposed Nasdaq Rule 4120(a)(10)(D). The Exchange also 
proposes conforming changes to Nasdaq Rules 4120(a)(12)(H) and 
4754(b)(6). The concept of holding a closing auction instead of a 
re-opening auction if a Trading Pause exists in the last ten minutes 
of trading is designed to be consistent across listing exchanges and 
to reflect the Twelfth Amendment to the Plan.
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Other Changes Related to the Re-Opening Process Following a Trading 
Pause

    Nasdaq Rule 4753(a)(3) currently defines ``Order Imbalance 
Indicator'' to mean a message disseminated by electronic means 
containing information about Eligible Interest and the price at which 
such interest would execute at the time of dissemination. The Exchange 
proposes to add that, for purposes of a Trading Pause initiated 
pursuant to Nasdaq Rule 4120(a)(12), ``Order Imbalance Indicator'' 
would also include Auction Reference Prices and Auction Collars, as 
defined in proposed Nasdaq Rule 4120(c)(10)(A).\20\
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    \20\ See proposed Nasdaq Rule 4753(a)(3)(F).
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    The Exchange also proposes to amend Nasdaq Rule 11890 to provide 
that executions as a result of a Halt Auction under Nasdaq Rule 
4120(c)(10) would not be eligible for a request to review as clearly 
erroneous under Nasdaq Rule 11890.\21\
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    \21\ The proposal to exclude re-opening auction trades from the 
clearly erroneous execution rule is designed to be consistent across 
listing exchanges.
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Other Changes Relating to Trading Pauses

    The Exchange proposes to amend Nasdaq Rule 4120(a)(12)(G) to state 
that if the Exchange is unable to re-open trading due to a systems or 
technology issue, it shall notify the Processor immediately.\22\ The 
Exchange also proposes to amend Nasdaq Rule 4120(a)(12)(H) to state 
that if a Trading Pause was initiated by another exchange, the Exchange 
may resume trading only upon receipt of Price Bands from the 
Processor.\23\
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    \22\ See proposed Nasdaq Rule 4120(a)(12)(G). This change is 
designed to be consistent across listing exchanges and to reflect 
the Twelfth Amendment to the Plan. The Exchange also proposes to 
delete rule text in Nasdaq Rule 4120(a)(12)(G) concerning phased 
implementation of the Plan, because the Plan has been fully 
implemented.
    \23\ See proposed Nasdaq Rule 4120(a)(12)(H). This change is 
designed to be consistent across listing exchanges and to reflect 
the Twelfth Amendment to the Plan.
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    The Exchange proposes to implement this proposed rule change in the 
third quarter of 2017.\24\ The Exchange represents that it will 
announce the implementation date of this proposed rule change via a 
notice to be issued after this proposed rule change is approved by the 
Commission.\25\
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    \24\ The Exchange explains that implementation of the proposed 
changes is contingent on the Securities Information Processors 
successfully implementing changes to their systems to allow for the 
new re-opening process, and the other Primary Listing Exchanges 
gaining approval of their related filings and their ability to 
implement the changes concurrent with Nasdaq. See Amendment No. 3, 
supra note 5.
    \25\ See id. For a more detailed description of the proposed 
rule change, see Notice, supra note 3.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment Nos. 2 and 3, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\26\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\27\ 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 foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. As noted above, the Commission 
received no comment letters regarding the proposed rule change.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed rule change is designed, 
together with the Twelfth Amendment to the Plan,\28\ to address the 
issues experienced on August 24, 2015 by reducing the number of repeat 
Trading Pauses in a single NMS Stock.\29\ The Commission notes that the 
proposed rule change is also designed to further the goal of 
establishing a standardized approach for how Primary Listing Exchanges 
would conduct certain aspects of an automated re-opening following a 
Trading Pause, which should provide certainty for market participants 
regarding how a security would re-open following a Trading Pause, 
regardless of the listing exchange.\30\
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    \28\ See supra note 6.
    \29\ See Notice, supra note 3, at 75882.
    \30\ See id.
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    With respect to the proposed Auction Reference Price and Auction 
Collars, the Commission finds reasonable the Exchange's belief that the 
price of the limit state that preceded the Trading Pause (i.e., either 
the Lower or Upper Price Band price) would better reflect the most 
recent price of the security, and therefore should be used as the

[[Page 8890]]

Auction Reference Price.\31\ Moreover, the Commission believes that the 
proposed method for calculating the initial Auction Collars (i.e., the 
Auction Collar on the opposite side of the trading pressure would be 
the Price Band in place before the Trading Pause was triggered) would 
address the concept of mean reversion, as well as avoid a security from 
trading outside of a price that it would have been permitted to trade 
before the Trading Pause.\32\
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    \31\ See Notice, supra note 3, at 75882-83.
    \32\ See Notice, supra note 3, at 75883.
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    The Commission believes that extending the Trading Pause and 
widening the Auction Collar on the side of the order imbalance would be 
a measured approach to provide additional time to attract offsetting 
interest, to help to address an imbalance that may not be resolved 
within the prior Auction Collars, and to reduce the potential for 
triggering another Trading Pause.\33\ Also, as the Exchange noted, 
widening the Auction Collar only in the direction of the order 
imbalance would address issues relating to the concept of mean 
reversion.\34\ Moreover, the Commission notes that the proposal to 
conduct a LULD Closing Cross pursuant to Nasdaq Rule 4754(b)(6) should 
a Trading Pause exist at or after 3:50 p.m. would be consistent with 
the Twelfth Amendment to the Plan.
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    \33\ See Notice, supra note 3, at 75882.
    \34\ See Notice, supra note 3, at 75883.
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    The Commission believes that it is appropriate to preclude requests 
to review executions as a result of a Halt Auction under Nasdaq Rule 
4120(c)(10) as clearly erroneous. The Commission notes that the 
proposed re-opening procedures would allow for widened collars, which 
may result in a re-opening price that would be away from prior trading 
prices, but the re-opening price would be the result of a measured and 
transparent process that reduces the potential that such a trade would 
be considered erroneous.\35\
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    \35\ See id.
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    The Commission believes that the proposed enhancements to the Order 
Imbalance Indicator would further promote transparency around the re-
opening process following a Trading Pause.
    Finally, the Commission notes that the proposed amendments to 
Nasdaq Rule 4210(a)(12)(G) and (H) would remove obsolete rule text and 
conform the remaining rule text to the Twelfth Amendment to the Plan.
    Based on the Exchange's representations mentioned above and in the 
Notice, and for the foregoing reasons, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 2 and 3, is 
consistent with Section 6(b)(5) of the Act \36\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \36\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-NASDAQ-2016-131), as 
modified by Amendment Nos. 2 and 3, be, and hereby is, approved.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02001 Filed 1-30-17; 8:45 am]
 BILLING CODE 8011-01-P


