
[Federal Register Volume 82, Number 170 (Tuesday, September 5, 2017)]
[Notices]
[Pages 42000-42003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18658]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81493; File No. SR-NASDAQ-2017-085]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 4752(d)(2)(F)(i)

August 29, 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 August 18, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 Rule 4752(d)(2)(F)(i) to permit the 
Exchange to calculate a derived price for use in the Opening Cross 
Price Test A when a security is the subject of a corporate action.
    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 purpose of the proposed rule change is to amend Rule 
4752(d)(2)(F)(i) to permit the Exchange to calculate a derived price 
for use in the Opening Cross Price Test A when a security is the 
subject of a corporate action. The Opening Price Tests are designed to 
avoid mispriced Opening Crosses, and the use of the clearly erroneous 
post-trade nullification process, by ensuring that the price 
established by the Opening Cross is reasonably related to the market 
and not the product of erroneous order entry. The Exchange believes 
that the proposed rule change will promote a more efficient Opening 
Cross by allowing the Exchange to base its Opening Price Tests on 
prices that are indicative of the value of the security after a 
corporate action.
Background
    Nasdaq's Opening Cross provides an industry-leading, transparent 
auction process that determines a single price for the opening. Rule 
4752(d)(2)(F) describes the Exchange's price protection for the Opening 
Cross. Once a security has an Opening Cross price set based on the 
process described in

[[Page 42001]]

Rule 4752(d)(2)(A)-(E), the Exchange requires the security to pass at 
least one of three ``tests'' in order for the Opening Cross to occur. 
These tests are designed to make sure that the price computed pursuant 
to Rule 4752(d)(2)(A)-(E) is reasonably related to the market for the 
security.
    Rule 4752(d)(2)(F)(i), i.e., Opening Price Test A, establishes a 
price test based on the closing price for the security. In particular, 
Rule 4752(d)(2)(F)(i) establishes a price range for the Opening Cross 
that is established by adding and subtracting the Opening Cross Price 
Test A threshold from the Nasdaq Official Closing Price (for Nasdsaq 
listed securities) or the consolidated closing price (for non-Nasdaq 
listed securities) of the security for the previous trading day. In 
addition, Rule 4752(d)(2)(F)(i) provides that the Opening Cross price 
range is established by adding and subtracting the Opening Cross Price 
Test A threshold from the offering price for new Exchange Traded 
Products that do not have a Nasdaq Official Closing Price. If the 
Nasdaq Opening Cross price is higher or lower than the Opening Cross 
price range established by Rule 4752(d)(2)(F)(i) or the security does 
not have a Nasdaq Official Closing Price or consolidated closing price 
for the previous trading day, Opening Cross Price Test B is performed.
    Pursuant to Rule 4752(d)(2)(F)(ii), the Opening Cross price range 
for Test B is established by adding and subtracting the Opening Cross 
Price Test B threshold from the Nasdaq last sale (either round or odd 
lot) after 9:15 a.m. ET but prior to the Opening Cross. If the Nasdaq 
Opening Cross price is higher or lower than the Opening Cross price 
range established by this subparagraph or if there is no Nasdaq last 
sale, Opening Cross Price Test C is performed. Pursuant to Rule 
4752(d)(2)(F)(iii), the Opening Cross price range for Test C is 
established by adding to and subtracting the Opening Cross Price Test C 
threshold from the Nasdaq best bid (for Opening Cross prices that would 
be higher than the closing price used for Opening Price Test A) or 
Nasdaq best offer (for Opening Cross prices that would be lower than 
the closing price used for Opening Price Test A). For purposes of this 
test, if a security does not have a Nasdaq Official Closing Price or 
consolidated closing price, as applicable, for the previous trading day 
Nasdaq will use a price of $0. If the Nasdaq Opening Cross price is 
higher or lower than the Opening Cross price range established by 
Opening Price Test C all Orders in the Opening Cross will be cancelled 
back to Participants, no Opening Cross will occur, and the security 
will open for regular market hours trading pursuant to Rule 4752(c).\3\
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    \3\ Rule 4752(c) provides that system securities in which no 
Nasdaq Opening Cross occurs shall begin trading at 9:30 a.m. by 
integrating Market Hours orders into the book in time priority and 
executing in accordance with market hours rules.
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Derived Price for Corporate Actions
    The Exchange now proposes to amend Rule 4752(d)(2)(F)(i) to permit 
the Exchange to calculate a derived price for use in the Opening Cross 
Price Test A when a security is the subject of a corporate action where 
the Exchange can calculate a derived price based on the terms of the 
corporate action.\4\ The Exchange is able to mathematically calculate a 
derived price in the case of standard corporate actions, and does so 
today. The Exchange can also calculate a derived price for certain non-
standard corporate actions as described in more detail later in this 
proposed rule change.\5\ Initially, the Exchange intends to calculate a 
derived price for non-standard corporate actions only in cases that 
involve the issuance of a new class of securities with similar 
terms.\6\ In the event the Exchange determines that it is capable of 
calculating a derived price for other non-standard corporate actions it 
will issue an Equity Trader Alert to inform members of the types of 
corporate actions where it will use derived prices in the Opening Price 
Tests pursuant to this proposed rule. The Exchange believes that using 
derived prices in the Opening Price Tests where possible will provide a 
more appropriate price test where closing and/or last sale prices are 
not available or reflective of the value of the security, and will 
therefore improve the experience for members and other market 
participants that trade in the Opening Cross.
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    \4\ As a conforming change, the Exchange also proposes to add 
references to the ``derived price'' where applicable in Rule 
4752(d)(F)(i) and (iii). Furthermore, as a rule correction, the 
Exchange proposes to add references to the ``offering price'' in 
these rules, as the offering price is used in Opening Price Test A 
for new Exchange Traded Products that do not have a Nasdaq Official 
Closing Price. The Exchange believes that these changes are 
necessary so that these rules appropriately reference the prices 
used in Opening Price Test A. With the changes, the last sentence of 
Rule 4752(d)(F)(i) will state that ``[i]f the Nasdaq Opening Cross 
price is higher or lower than the Opening Cross price range 
established by this subparagraph or the security does not have a 
Nasdaq Official Closing Price or consolidated closing price for the 
previous trading day, offering price, or derived price, as 
applicable, Opening Cross Price Test B will be performed.'' In 
addition, the second sentence of Rule 4752(d)(F)(iii) will state 
that ``[f]or purposes of this test, if a security does not have a 
Nasdaq Official Closing Price or consolidated closing price for the 
previous trading day, offering price, or derived price, as 
applicable, Nasdaq will use a price of $0.'' Furthermore, the 
Exchange proposes to remove the word ``closing'' when discussing 
these prices in the parentheticals in the first sentence of Rule 
4752(d)(F)(iii), so that it is clear that this refers to the price 
used in Opening Price Test A, regardless of whether that price is a 
closing price, offering price, or derived price.
    \5\ There may also be other non-standard corporate actions, such 
as in the case of a spinoff, where the Exchange is not capable of 
calculating a derived price.
    \6\ If the Exchange is not capable of calculating a derived 
price, the Exchange will perform each of the Opening Price Tests A, 
B, and C without a derived price.
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    Currently, for standard corporate actions (e.g., a stock split or 
reverse stock split) the Exchange adjusts the price of the security 
before applying the Opening Cross Price Tests contained in Rule 
4752(d)(2)(F). Thus, for example if a Nasdaq listed security that 
closed at a Nasdaq Official Closing Price of $50 per share is subject 
to a 2 for 1 stock split, the Exchange would adjust the closing price 
to $25 per share prior to applying the Opening Cross Price Test A. This 
process ensures that the prices used for the Opening Price Test A 
accurately reflect the value of the security after the corporate 
action. The Exchange proposes to codify this practice in Rule 
4752(d)(2)(F)(i) so that members and market participants are 
appropriately advised of how the Opening Price Tests are applied to 
securities that are subject to a standard corporate action.
    In addition, securities traded on Nasdaq are infrequently subject 
to non-standard corporate actions that involve, for instance, a second 
class of shares with slightly different terms, such as a class of 
shares with different voting rights. An example of such a corporate 
action was the Google transaction in 2014 where owners of Google Class 
A stock received one share of Class C non-voting stock for every share 
of Class A stock held. Currently, the Exchange does not perform a 
similar adjustment for non-standard corporate actions. The Exchange 
believes, however, that it is appropriate to calculate a derived price 
in these situations too.
    Importantly, in cases of non-standard corporate actions, if the 
Exchange does not have the flexibility to adjust the stock price such 
securities may fail the Exchange's Opening Cross Price Tests on the day 
following the corporate action. In particular, today, if a security is 
subject to a non-standard corporate action where a new class of 
security is issued, it is guaranteed to fail Opening Price Test A due 
to the lack of appropriate closing prices on which to base that test. 
In addition, such securities may fail Opening Price Test B if there is 
no pre-market trading after 9:15 a.m. ET to establish a last sale 
price, and may fail Opening Price Test

[[Page 42002]]

C if the Nasdaq best bid or offer is sufficiently wide that the opening 
price calculated by the auction is outside the Opening Cross price 
range for Test C. Since there is no guarantee that there will be pre-
market trading to establish a last sale price, or that there will be a 
sufficiently narrow best bid or offer, a security may fail the Opening 
Price Tests even when a proper price is determined by the Nasdaq 
Opening Cross. The Exchange does not believe that it is in the interest 
of a fair and orderly market to cancel an opening auction where the 
Nasdaq Opening Cross price is reflective of the market for the security 
as indicated by derived prices based on the terms of the corporate 
action.
    The Google transaction described above pre-dates the Opening Price 
Tests, which Nasdaq adopted in 2016.\7\ The Exchange believes, however, 
that if those tests were in place at the time of that transaction they 
could have interfered with the Exchange's ability to execute a 
successful opening auction. The proposed rule change is designed to 
prevent such a situation for future corporate actions. The Exchange 
believes that market participants value trading in the Opening Cross, 
and would therefore be better served by Nasdaq determining a derived 
price to be used in the Opening Price Tests that reflects the value of 
the security after the corporate action. Although in some cases a 
security may pass Opening Price Test B or C following a non-standard 
corporate action, the Exchange believes that members and other market 
participants are better served when the tests as a whole more closely 
relate to the market for the security subject to the corporate action.
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    \7\ See Securities Exchange Act Release No. 77235 (February 25, 
2016), 81 FR 10935 (March 2, 2016) (SR-NASDAQ-2015-159) (Approval 
Order).
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    The Exchange therefore proposes to amend its rules to allow it to 
calculate its Opening Price Test A for non-standard corporate actions 
by using a derived price calculated based on the terms of the corporate 
action, similar to the process described above for standard corporate 
actions today. This process will be used only for corporate actions 
where, similar to the Google transaction described above, the Exchange 
can calculate a derived price based on the terms of the corporate 
action. As previously discussed, the Exchange will initially use this 
authority only for non-standard corporate actions that involve the 
issuance of a new class of securities with similar terms; provided that 
if the Exchange determines that it is capable of calculating a derived 
price for other non-standard corporate actions it will issue an Equity 
Trader Alert to inform members of the types of corporate actions where 
it will use derived prices. Thus, for example, assume a Nasdaq listed 
security (Class A) is issuing a dividend of 2 shares of a new class of 
stock (Class C). If the Class A stock is trading at a price of $120 
prior to the corporate action, the Exchange could derive a price for 
each share of Class A and new Class C stock that is $40 per share 
(i.e., $120 / 3) for purposes of the Opening Price Tests. Although 
there may be differences in the trading characteristics between Class A 
and Class C stock, the Exchange believes that using this derived price 
for calculation of the Opening Price Tests will provide a more 
reasonable basis for determining the validity of prices determined by 
the Opening Cross.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is consistent 
with the protection of investors and the public interest as it will 
allow the Exchange to calculate a derived price for use in the Opening 
Cross Price Test A when a security is the subject of a non-standard 
corporate action. The Exchange also believes that the proposed rule 
change will promote just and equitable principles of trade by 
increasing transparency around the Exchange's current process for 
adjusting the prices used in Opening Cross Price Test A for securities 
that are subject to vanilla corporate actions. The Opening Cross 
provides an industry-leading, transparent price discovery process that 
aggregates a large pool of liquidity, across a variety of order types, 
in a single venue. Today, the Exchange may not be able to execute a 
successful Opening Cross for a security that is subject to a non-
standard corporate action, as the prices used to compute the Opening 
Cross price ranges do not reflect the actual value of the security 
after the completion of the corporate action. Furthermore, in cases 
where a new class of securities is issued, there may be no applicable 
closing and/or last sale prices for the new class of securities to use 
to calculate the applicable Opening Cross price ranges. The proposed 
rule change would remedy this by allowing the Exchange to calculate an 
appropriate derived price to use for Opening Price Test A. The Exchange 
believes that this change will increase the likelihood that Nasdaq can 
execute a successful Opening Cross following a non-standard corporate 
action, and thereby promotes just and equitable principles of trade and 
perfects the mechanisms of a free and open market.

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. The proposed rule change is 
designed to increase the likelihood that the Exchange can execute a 
successful Opening Cross in securities that are subject to a corporate 
action, and is not intended to have any significant impact on 
competition. To the contrary, the Exchange believes that the proposed 
rule change is evidence of the strong competition in the equities 
industry, where exchanges must continually improve their offerings to 
stay competitive.

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) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and the text of 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

[[Page 42003]]

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-2017-085 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-2017-085. 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-2017-085 and should 
be submitted on or before September 26, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-18658 Filed 9-1-17; 8:45 am]
 BILLING CODE 8011-01-P


