[Federal Register Volume 83, Number 11 (Wednesday, January 17, 2018)]
[Notices]
[Pages 2471-2474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00634]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82479; File No. SR-NASDAQ-2018-002]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Add a New Rule 6200 To Codify Participant Risk Settings in the 
Exchange's Trading System (as Set Forth in a Proposed IM-6200-1) and To 
Authorize the Exchange To Share Those Settings With the Clearing Member 
That Clears Transactions on Behalf of the Participant

January 10, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 2472]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 3, 2018, 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 add a new Rule 6200 to codify Participant 
risk settings in the Exchange's trading system (as set forth in a 
proposed IM-6200-1) and to authorize the Exchange to share such risk 
settings with the clearing member that clears transactions on behalf of 
the Participant.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deleted text is in brackets.
* * * * *
The Nasdaq Stock Market Rules
* * * * *
Equity Rules
* * * * *
[6200. Reserved.]

6200. Exchange Sharing of Participant Risk Settings

    The Exchange may share any Participant risk settings in the trading 
system specified in IM-6200-1 with the clearing member that clears 
transactions on behalf of the Participant. For purposes of this Rule, 
the term ``Participant'' has the meaning set forth in Rule 4701(c).

IM-6200-1. Risk Settings

    The Exchange offers certain risk settings applicable to a 
Participant's activities on the Exchange. The risk settings currently 
offered by the Exchange are:
    (a) Share Size Control--When enabled by a Participant, this 
optional control will allow a Participant to limit the number of shares 
that the Participant may associate with an order placed on the 
Exchange;
    (b) ISO Control--When enabled by a Participant, this optional 
control will prevent a Participant from entering an ISO order onto the 
Exchange;
    (c) Cancel-on-Disconnect Control--When enabled by a Participant, 
this optional control will allow a Participant, when it experiences a 
disruption in its connection to the Exchange, to immediately cancel all 
pending Exchange orders except for those designated for the Opening or 
Closing Crosses and Good-Till-Canceled orders (RASH & FIX only);
    (d) The Nasdaq Kill Switch--This control is described in Rule 6130;
    (e) Limit Order Protection--This control is described in Rule 
4757(c);
    (f) Price Collar Check--This control will automatically restrict a 
routed order from executing at a price that differs from the NBBO (at 
the time of order entry) by more than five percent or $0.25, whichever 
difference is greater. The system will proceed to route an order unless 
and until it crosses the greater of these two price collars, and if it 
does so, then the system will block further routings of the order that 
fall outside of the collars. For example, if the NBBO is $99 x $100 at 
the time of entry of a buy order, then the system will route the order 
at prices at or below $105, but will stop doing so if the offer price 
rises above $105 (five percent of the NBO).
    (g) Maximum Order Volume Check--This control will automatically 
reject an order for routing away that exceeds a maximum volume of 
shares. As applied to equity orders, the default maximum order volume 
is set at 25,000 shares, but the Participant may request that the 
Exchange set a higher default based on historic volume.
    (h) Cumulative Order Volume Check--This control will automatically 
block an attempt by a Participant using a particular MPID to route 
orders away to buy or sell equity securities that, cumulatively, exceed 
9.5 million shares during a five second time period; and
    (i) Duplication Control--This control will automatically reject an 
order that a Participant submits to the Exchange to the extent that it 
is duplicative of another order that the Participant submitted to the 
Exchange during the prior five seconds.
* * * * *

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 proposes to adopt proposed IM-6200-1, which codifies a 
comprehensive list of Participant risk settings in the Exchange's 
trading system. The Exchange also proposes to adopt new Rule 6200 to 
authorize the Exchange to share these risk settings with the clearing 
member that clears transactions on behalf of the Participant. For 
purposes of Rule 6200, the term ``Participant'' has the meaning set 
forth in Rule 4701(c).\3\
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    \3\ A ``Participant'' is an entity that fulfills the obligations 
contained in Rule 4611 regarding participation in the System, and 
includes Nasdaq ECNs, Nasdaq Market Makers, and Order Entry Firms.
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    Participants are required to be members of the Exchange. Rule 4618 
states that ``all transactions through the facilities of the Nasdaq 
Market Center shall be cleared and settled through a registered 
clearing agency using a continuous net settlement system.'' It further 
provides that this requirement may be satisfied by ``direct 
participation, use of direct clearing services, by entry into a 
correspondent clearing arrangement with another member that clears 
trades through such a clearing agency. . . .'' Further, pursuant to 
Rule 4627, every clearing member acting on a Participant's behalf that 
constitutes a side of a system trade is responsible for honoring such 
trades of that Participant.
    All Participants that are not clearing members require a clearing 
member's consent to clear transactions on their behalf in order to 
conduct business on the Exchange. Each Participant that transacts 
through a clearing member on the Exchange must have an arrangement 
between the Participant and the clearing member. The Exchange is 
provided notice of which clearing members have relationships with which 
Participants. The clearing member that guarantees the Participant's 
transactions on the Exchange has a financial interest in understanding 
the risk tolerance of the Participant. The proposal would provide the 
Exchange with authority to directly provide clearing members with 
information that may otherwise be available to such clearing members by 
virtue of their relationship with the respective Participants.\4\
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    \4\ The Exchange notes that its proposal would cover Sponsored 
Participants, as set forth in Rule 4615, meaning that the proposal 
would authorize the Exchange to share the risk settings of Sponsored 
Participants with clearing members that clear trades on their 
behalf.

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[[Page 2473]]

    Proposed IM-6200-1 would codify a list of risk settings that are 
currently offered by the Exchange and would be covered by proposed Rule 
6200. This list is comprehensive with respect to the risk settings that 
the Exchange presently offers. Certain of these risk settings are 
mandatory for Participants, meaning that the Exchange either imposes 
specific risk tolerances that are uniform for all Participants or it 
sets default risk tolerances, but it affords flexibility to 
Participants to select their own risk tolerance levels. In certain 
instances, the Exchange does not require Participants to utilize risk 
settings, but instead makes them available for use at the option of 
Participants. The risk settings set forth in proposed IM-6200-1 
comprise the following:
     Share Size Control--When enabled by a Participant, this 
optional control will allow a Participant to limit the number of shares 
that the Participant may associate with an order placed on the 
Exchange;
     ISO Control--When enabled by a Participant, this optional 
control will prevent a Participant from entering an ISO order onto the 
Exchange;
     Cancel-on-Disconnect Control--When enabled by a 
Participant, this optional control will allow a Participant, when it 
experiences a disruption in its connection to the Exchange, to 
immediately cancel all pending Exchange orders except for those 
designated for the Opening or Closing Crosses, and Good-Till-Canceled 
orders (RASH & FIX only);
     The Nasdaq Kill Switch--This control is described in Rule 
6130;
     Limit Order Protection--This control is described in Rule 
4757(c);
     Price Collar Check--This control will automatically 
restrict a routed order from executing at a price that differs from the 
NBBO (at the time of order entry) by more than five percent or $0.25, 
whichever difference is greater. The system will proceed to route an 
order unless and until it crosses the greater of these two price 
collars, and if it does so, then the system will block further routings 
of the order that fall outside of the collars. For example, if the NBBO 
is $99 x $100 at the time of entry of a buy order, then the system will 
route the order at prices at or below $105, but will stop doing so if 
the offer price rises above $105 (five percent of the NBO).
     Maximum Order Volume Check--This control will 
automatically reject an order for routing away that exceeds a maximum 
volume of shares. As applied to equity orders, the default maximum 
order volume is set at 25,000 shares, but the Participant may request 
that the Exchange set a higher default based on historic volume.
     Cumulative Order Volume Check--This control will 
automatically block an attempt by a Participant using a particular MPID 
to route orders away to buy or sell equity securities that, 
cumulatively, exceed 9.5 million shares during a five second time 
period; and
     Duplication Control--This control will automatically 
reject an order that a Participant submits to the Exchange to the 
extent that it is duplicative of another order that the Participant 
submitted to the Exchange during the prior five seconds.
    As set forth above, the proposal to authorize the Exchange to share 
any of the Participant's risk settings with the clearing member that 
clears transactions on behalf of the Participant would be limited to 
the risk settings specified in proposed IM-6200-1. The Exchange notes 
that use by a Participant of the risk settings offered by the Exchange 
is optional for share size, ISO, kill switch, and cancel-on disconnect 
controls, and is required in other instances.\5\ By using the optional 
risk settings, following this proposed Rule change a Participant 
therefore also opts-in to the Exchange sharing its risk settings with 
its clearing member. The Exchange notes that any Participant that does 
not wish to share its mandatory risk settings with its clearing member 
could avoid sharing such settings by becoming a clearing member.
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    \5\ As noted above, for the Maximum Order Volume Check, the 
Exchange sets a default order volume but Participants have 
flexibility to adjust this level.
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    To the extent that a clearing member might reasonably require a 
Participant to provide access to its risk settings as a prerequisite to 
continuing to clear trades on the Participant's behalf, the Exchange's 
proposal to share those risk settings directly reduces the 
administrative burden on Participants and ensures that clearing members 
are receiving information that is up-to-date and conforms to the 
settings active in the Exchange's trading system. Further, the Exchange 
believes that the proposal will help such clearing members to better 
monitor and manage the potential risks that they assume when clearing 
for Participants of the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\7\ in particular, in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and 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.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change will allow the Exchange to directly 
provide a Participant's risk settings to the clearing member that 
clears trades on behalf of the Participant. A clearing member 
guarantees transactions executed on Nasdaq for members with whom it has 
entered into a clearing arrangement, and therefore bears the risk 
associated with those transactions. The Exchange therefore believes 
that it is appropriate for the clearing member to have knowledge of 
what risk settings the Participant may utilize within the Exchange's 
trading system. The proposal will permit clearing members who have a 
financial interest in the risk settings of Participants with whom the 
Participants have entered into clearing arrangements to better monitor 
and manage the potential risks assumed by clearing members, thereby 
providing clearing members with greater control and flexibility over 
setting their own risk tolerance and exposure and aiding clearing 
members in complying with the Act. To the extent a clearing member 
might reasonably require a Participant to provide access to its risk 
settings as a prerequisite to continuing to clear trades on the 
Participant's behalf, the Exchange's proposal to share those risk 
settings directly reduces the administrative burden on Participants and 
ensures that clearing members are receiving information that is up-to-
date and conforms to the settings active in the Exchange's trading 
system. Moreover, the proposal will foster cooperation and coordination 
with persons engaged in facilitating transactions in securities and 
more generally, will protect investors and the public interest, by 
reducing administrative burdens on both clearing members and other 
Participants and by allowing clearing members to better monitor their 
risk exposure.
    The Exchange further believes that codifying the risk settings 
described above in proposed IM-6200-1 is consistent with the Act. These 
settings

[[Page 2474]]

assist Participants in managing and controlling the risks associated 
with their access to and activity on the Exchange, both for the benefit 
of Participants and investors. The Exchange's risk settings, moreover, 
are consistent with risk settings employed by other exchanges, such as 
Cboe BYX. Although the Exchange presently offers these risk settings, 
codifying them will provide additional transparency to Participants 
regarding the risk settings offered by the Exchange. It will also 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities and more generally, will 
protect investors and the public interest, by providing additional 
transparency regarding risk settings offered by the Exchange.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act, as amended. The proposed 
rule change is not designed to address any competitive issues and does 
not pose an undue burden on non-clearing members because, unlike 
clearing members, non-clearing members do not guarantee the execution 
of a Participant's transactions on the Exchange. Moreover, the proposal 
to share risk settings with clearing members will not burden 
competition among clearing members because it will apply to all 
clearing members equally and regardless of size. The Exchange notes 
that this proposal will not affect competition among Participants 
because the proposal provides for sharing of all of Participants' risk 
settings set forth in IM-6200-1. Any Participant that does not wish to 
share its risk settings with its clearing member could avoid sharing 
such settings by becoming a clearing member. Lastly, the proposal to 
codify the Exchange's risk settings will not burden competition among 
Participants because the risk settings are already available to or 
required of Participants and will continue to be available or required 
of all Participants going forward.

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 \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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 Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 [email protected]. Please include 
File Number SR-NASDAQ-2018-002 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-2018-002. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-002 and should be submitted 
on or before February 7, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00634 Filed 1-16-18; 8:45 am]
 BILLING CODE 8011-01-P


