
[Federal Register Volume 82, Number 141 (Tuesday, July 25, 2017)]
[Notices]
[Pages 34557-34559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15530]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81171; File No. SR-NASDAQ-2017-069]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Enhance Anti-Internalization Functionality

July 19, 2017.
    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 July 6, 2017, 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, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Chapter VI, Section 10 of the rules 
of the NASDAQ Options Market (``NOM'') to enhance anti-internalization 
functionality.
    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.

[[Page 34558]]

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 purpose of the proposed rule change is to enhance the anti-
internalization (``AIQ'') functionality provided to market makers on 
NOM by giving members the flexibility to choose to have this protection 
apply at the market participant identifier (``MPID'') level (i.e., 
existing functionality), at the Exchange account level, or at the 
member firm level. The Exchange believes that this enhancement will 
provide helpful flexibility for market making firms that wish to 
prevent trading against all quotes and orders entered by their firm, or 
Exchange account, instead of just quotes and orders that are entered 
under the same MPID.
    Currently, the Exchange provides mandatory AIQ functionality 
whereby quotes and orders entered by market makers using the same MPID 
are not executed against quotes and orders entered on the opposite side 
of the market by the same market maker using the same identifier.\3\ 
When a quote or order entered by a market maker would trade with other 
quotes or orders from the same market maker, the trading system cancels 
the oldest of the quotes or orders back to the entering party prior to 
execution.\4\ AIQ assists market makers in reducing trading costs from 
unwanted executions potentially resulting from the interaction of 
executable buy and sell trading interest from the same firm when 
performing the same market making function.
---------------------------------------------------------------------------

    \3\ See Chapter VI, Section 10.
    \4\ Id. A quote or order entered by a market maker only triggers 
AIQ when it would trade with other quotes or orders from the same 
market maker. Thus, an incoming quote or order entered by a market 
maker may interact with other interest with priority on the book 
prior to triggering AIQ.
---------------------------------------------------------------------------

    Today, this protection prevents market makers from trading against 
their own quotes and orders at the MPID level. The proposed enhancement 
to this functionality would allow members to choose to have this 
protection applied at the MPID level as implemented today, at the 
Exchange account level, or at the member firm level. If members choose 
to have this protection applied at the Exchange account level, AIQ 
would prohibit quotes and orders from different MPIDs associated with 
the same Exchange account from trading against one another. Similarly, 
if the members choose to have this protection applied at the member 
firm level, AIQ would prohibit quotes and orders from different MPIDs 
within the member firm from trading against one another. Members that 
do not select to have this protection applied at the Exchange account 
level or member firm level will have their AIQ protection defaulted to 
the MPID level protection applied today. The Exchange believes that the 
proposed AIQ enhancement will provide members with more tailored self-
trade functionality that allows them to manage their trading as 
appropriate based on the members' business needs. While the Exchange 
believes that some firms will want to restrict AIQ to trading against 
interest from the same MPID--i.e., as implemented today--the Exchange 
believes that other firms will find it helpful to be able to configure 
AIQ to apply at the Exchange account level or at the member firm level 
so that they are protected regardless of which MPID the order or quote 
originated from. Similar functionality also exists on the BATS BZX 
Exchange (``BZX''), which provides members the ability to apply Match 
Trade Prevention (``MTP'') modifiers--i.e., BZX's version of self-trade 
protection--based on MPID, Exchange Member, trading group, or Exchange 
Sponsored Participant identifiers.\5\
---------------------------------------------------------------------------

    \5\ See BZX Rule 21.1(g).
---------------------------------------------------------------------------

    The examples below illustrate how AIQ would operate based on the 
MPID level protection, the Exchange account level, or for members that 
choose to apply AIQ at the member firm level:
Example 1
    1. Member ABC (MPID 123A & 555B) with AIQ configured at the MPID 
level.
    2. 123A Quote: $1.00 (5) x $1.10 (20).
    3. 555B Buy Order entered for 10 contracts at $1.10.
    4. 555B Buy Order executes 10 contracts against 123A Quote. 123A 
and 555B are permitted trade against one another because Member ABC has 
configured AIQ to apply at the MPID level. This is the same as existing 
functionality.
Example 2
    1. Member ABC (Account 999 with MPIDs 123A and 555B, and Account 
888 with MPID 789A) with AIQ configured at the Exchange account level.
    2. 123A Quote: $1.00 (5) x $1.10 (20).
    3. 789A Quote: $1.05(10) x $1.10 (20).
    4. 555B Buy Order entered for 30 contracts at $1.10.
    5. 555B Buy Order executes against 789A Quote but 555B Buy Order 
does not execute against 123A Quote. AIQ purges the 123A Quote and the 
remaining contracts of the 555B Buy Order rests on the book at $1.10. 
123A and 555B are not permitted trade against one another because 
Member ABC has configured AIQ to apply at the Exchange account level. 
This is new functionality as the member has opted to have AIQ operate 
at the Exchange account level.
Example 3
    1. Same as Example 2 above but Member ABC has AIQ configured at the 
member level.
    2. AIQ purges the 123A Quote and the 789A Quote and the 555B Buy 
Order rests on the book at $1.10. This is new functionality as the 
member has opted to have AIQ operate at the member level.
Implementation
    The Exchange proposes to launch the AIQ functionality described in 
this proposed rule change in either Q3 or Q4 2017. The Exchange will 
announce the implementation date of this functionality in an Options 
Trader Alert issued to members prior to the launch date.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\6\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\7\ because it is designed to promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is consistent 
with

[[Page 34559]]

the protection of investors and the public interest as it is designed 
to provide NOM market makers with additional flexibility with respect 
to how to implement self-trade protections provided by AIQ. Currently, 
all market makers are provided functionality that prevents quotes and 
orders from one MPID from trading with quotes and orders from the same 
MPID. This allows market makers to better manage their order flow and 
prevent undesirable executions where the market maker, using the same 
MIPID, would be on both sides of the trade. While this functionality is 
helpful to our members, some members would prefer not to trade with 
quotes and orders entered by different MPIDs within the same Exchange 
account or member. Thus, the Exchange is proposing to provide members 
with flexibility with respect to how AIQ is implemented. While members 
that like the current functionality can continue to use it, members who 
would prefer to prevent self-trades across different MPIDs within the 
same Exchange account or at the member level will now be provided with 
functionality that lets them do this. Similar functionality also exists 
on BZX,\8\ and the Exchange believes that flexibility to apply AIQ at 
the Exchange account or member firm level would be useful for NOM 
members too. The Exchange believes that the proposed rule change is 
designed to promote just and equitable principles of trade and will 
remove impediments to and perfect the mechanisms of a free and open 
market as it will further enhance self-trade protections provided to 
NOM market makers similar to those protections provided on other 
markets. This functionality does not relieve or otherwise modify the 
duty of best execution owed to orders received from public customers.
---------------------------------------------------------------------------

    \8\ See supra note 5.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\9\ the Exchange does 
not believe that the proposed rule change will impose any burden on 
intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change is designed to enhance AIQ functionality provided to NOM 
market makers, and will benefit members that wish to protect their 
quotes and orders against trading with other quotes and orders within 
the same Exchange account or member, rather than the more limited MPID 
standard applied today. The new functionality, which is similar to 
functionality already provided on BZX, is also completely voluntary, 
and members that wish to use the current functionality can also 
continue to do so. The Exchange does not believe that providing more 
flexibility to members will have any significant impact on competition. 
In fact, the Exchange believes that the proposed rule change is 
evidence of the competitive environment in the options industry where 
exchanges must continually improve their offerings to maintain 
competitive standing.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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 \10\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 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.
---------------------------------------------------------------------------

    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-2017-069 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-2017-069. 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-2017-069 and should 
be submitted on or before August 15, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15530 Filed 7-24-17; 8:45 am]
 BILLING CODE 8011-01-P


