[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)]
[Notices]
[Pages 23978-23981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10973]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83272; File No. SR-NASDAQ-2018-038]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 4702(b)(14) To 
Establish a Price Improvement Only Variation on the Midpoint Extended 
Life Order

May 17, 2018.
    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 May 4, 2018, 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 Rule 4702(b)(14) to establish a 
price improvement only variation on the Midpoint Extended Life Order.
    The text of the proposed rule change is available on the Exchange's 
website 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

[[Page 23979]]

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 amend Rule 4702(b)(14) to establish a 
``Price Improvement Only'' or ``PIO'' option for the Midpoint Extended 
Life Order (``M-ELO'').
    On March 7, 2018, the Commission issued an order approving the 
Exchange's proposal to adopt the M-ELO as a new order type.\3\ A M-ELO 
is a non-displayed order that is available to all members but interacts 
only with other M-ELOs. It is priced at the midpoint between the 
National Best Bid and Offer (``NBBO'') and it does not become eligible 
for execution until it completes a half second holding period (the 
``Holding Period'').\4\ Once the Holding Period elapses, a M-ELO 
becomes eligible for execution against other M-ELOs on a time-priority 
basis.\5\
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    \3\ See Securities Exchange Act Release No. 34-82825 (Mar. 7, 
2018), 83 FR 10937 (Mar. 13, 2018).
    \4\ If a member modifies a M-ELO during the Holding Period, 
other than to decrease the size of the order or to modify the 
marking of a sell order as long, short, or short exempt, then such 
modification will cause the Holding Period to reset.
    \5\ If a member modifies a M-ELO after the Holding Period 
elapses, other than to decrease the size of the order or to modify 
the marking of a sell order as long, short, or short exempt, then 
such modification will trigger a new Holding Period for the order.
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    Under existing Rule 4702(b)(14), a member may designate a limit 
price for a M-ELO, in which case the order would be: (1) Eligible for 
execution in time priority after satisfying the Holding Period if upon 
acceptance of the order by the system, the midpoint price is within the 
limit set by the member; or (2) held until the midpoint falls within 
the limit set by the member, at which time the Holding Period would 
commence and thereafter the system would make the order eligible for 
execution in time priority.
    The Exchange now proposes to amend Rule 4702(b)(14) to adopt an 
optional ``Price Improvement Only'' or ``PIO'' option for the M-ELO.
    Under the Exchange's proposal, if a member opts to designate a M-
ELO with PIO, then the M-ELO will execute only in circumstances where 
the NBBO midpoint price provides the Order with price improvement (of 
at least a half penny for a MELO priced at or above $1.00) as measured 
against the original limit price of the M-ELO with PIO (i.e., lower 
than a buy limit price or higher than a sell limit price).\6\ The 
Holding Period of a M-ELO with PIO will commence: (1) Upon acceptance 
of the Order by the System, if the midpoint price provides price 
improvement on the limit set by the participant; or (2) when the 
midpoint price updates such that it provides price improvement on the 
limit set by the participant. If, at the time when the System accepts 
the Order, the midpoint of the NBBO equals or is higher than the 
participant's buy limit price or lower than the participant's sell 
limit price, as applicable, then the Holding Period for the Order will 
not commence unless or until the midpoint of the NBBO shifts in a 
manner that would allow the M-ELO with PIO to execute at a price that 
provides price improvement, in which case the Holding Period for the 
Order will commence. If, upon satisfaction of the Holding Period, the 
midpoint of the NBBO continues to provide price improvement relative to 
the designated limit price, then the M-ELO with PIO will be eligible 
for execution in time priority and may execute at that improved price. 
If upon satisfaction of the Holding Period, however, the midpoint of 
the NBBO no longer provides price improvement relative to the 
designated limit price, then the M-ELO with PIO will not be eligible 
for execution, and it will remain posted on the Nasdaq Book 
(maintaining its relative priority) unless and until the midpoint of 
the NBBO shifts in a manner that does provide price improvement, at 
which point the M-ELO with PIO will be eligible for execution at the 
improved price.
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    \6\ To utilize the PIO variant of M-ELO, a participant must 
specify a limit price for the order upon entry. If a participant 
fails to set a limit price, then the Exchange will not accept the 
order.
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    In all other respects, a M-ELO with PIO will behave the same as an 
ordinary M-ELO, and as set forth in Rule 4702(b)(14). For example, a M-
ELO with PIO will interact only with other M-ELOs (including both 
ordinary M-ELOs and M-ELOs with PIO) and it will be ranked among 
ordinary M-ELOs and M-ELOs with PIO on the Nasdaq Book on a time 
priority basis.
Example 1
    Member A enters a M-ELO with PIO to buy 1,000 shares with a limit 
price of $11.04. At the same time, Member B enters a M-ELO with PIO to 
sell 1,000 shares with a limit price of $11.02. Assume the Best Bid at 
the time of entry of these Orders is $11.00 and the Best Offer is 
$11.06, such that the midpoint price is $11.03. Because the $11.03 
midpoint price provides price improvement as measured against Member 
A's specified limit price and as measured against Member B's specified 
limit price, the Holding Periods for the two Orders will commence. 
After the Holding Periods for both Orders conclude, the NBBO remains 
unchanged and so the Orders are eligible for execution. Accordingly, 
the two Orders will then execute against each other at $11.03.
Example 2
    Member A enters a M-ELO with PIO to buy 500 shares with a limit 
price of $11.04. At the same time, Member B enters a M-ELO with PIO to 
sell 1,000 shares with a limit price of $11.03. Just after Member B 
enters its order, Member C enters a M-ELO to sell 1,000 shares at a 
limit price of $11.03. Assume the Best Bid at the time of entry of 
these Orders is $11.00 and the Best Offer is $11.06, such that the 
midpoint price is $11.03. The Holding Period for Member B's Order will 
not commence because its limit price equals the midpoint of the NBBO. 
However, the Holding Periods for Member A's Order and Member C's Order 
will commence because the $11.03 midpoint of the NBBO is lower/higher 
than the respective limit prices associated with these two Orders 
[sic]. At the conclusion of Member A and Member C's Holding Periods, 
the NBBO remains unchanged. Member A's Order will execute against 
Member C's Order for 500 shares.
Example 3
    Member A enters a M-ELO with PIO to buy 500 shares with a limit 
price of $11.04. At the same time, Member B enters a M-ELO with PIO to 
sell 500 shares with a limit price of $11.03. Assume the Best Bid at 
the time of entry of these Orders is $11.00 and the Best Offer is 
$11.06, such that the midpoint price is $11.03. At the time of Order 
entry, the Holding Period for Member B's Order will not commence, 
because the midpoint of the NBBO equals, but is not higher than, the 
limit price that Member B designated on its M-ELO with PIO. However, 
the Holding Period for Member A's M-ELO with PIO Order will commence, 
because the $11.03 midpoint provides price improvement as measured 
against Member A's specified limit price. At the conclusion of Member 
A's Holding Period, the Best Bid becomes $11.02 and the Best Offer 
remains $11.06, such that the midpoint price becomes $11.04. The 
Holding Period for Member B's Order will commence, because the $11.04 
midpoint price provides price improvement as measured against Member 
B's specified limit price. At the

[[Page 23980]]

conclusion of Member B's Holding Period, Member B's Order will not 
execute against Member A's Order because the $11.04 midpoint price does 
not provide price improvement as measured against Member A's specified 
limit price. However, Member A's Order will remain posted on the Nasdaq 
book and retain its priority.
    The Exchange believes that the M-ELO with PIO will afford members 
more flexibility with respect to their use of M-ELO and greater 
opportunities for price improvement when they do so. In particular, the 
proposal will afford M-ELO participants with a measure of protection 
against unfavorable movements in the NBBO that may occur during half-
second Holding Periods that are unique to M-ELOs. In absence of the PIO 
feature, members facing such movements will have to constantly manage 
their M-ELO orders (e.g., canceling and resubmitting their orders). The 
PIO feature will free members from the need to constantly manage their 
M-ELO orders during their Holding Periods
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ 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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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The reasons why the M-ELO with PIO is consistent with the Act are 
generally the same as those that the Commission identified in its order 
approving the M-ELO order type.\9\ That is, just as the Commission 
determined that M-ELO ``could create additional and more efficient 
trading opportunities on the Exchange for investors with longer 
investment time horizons, including institutional investors,'' \10\ so 
too will the M-ELO with PIO do so in that the M-ELO with PIO will offer 
M-ELO investors increased flexibility and efficiency in achieving their 
investment outcomes as well as new opportunities for price improvement. 
Moreover, just as the Commission determined that the M-ELO is 
``reasonably designed to enhance midpoint execution quality on the 
Exchange'' notwithstanding the fact that M-ELO allows market 
participants to elect not to execute against certain contra-side 
interest,\11\ the Exchange believes that M-ELO with PIO is reasonably 
designed in that the additional condition that a M-ELO with PIO imposes 
on a M-ELO execution--the midpoint of the NBBO must provide price 
improvement as measured against the limit price that the participant 
designates--is not unfair.\12\ Like the M-ELO, the M-ELO with PIO is 
equitable insofar as it will be available to all Nasdaq members. In 
sum, the Exchange believes that the M-ELO with PIO, like the M-ELO 
``represents a reasonable effort to enhance the ability of longer-term 
trading interest to participate effectively on an exchange, without 
discriminating unfairly against other market participants or 
inappropriately or unnecessarily burdening competition.'' \13\
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    \9\ See Securities Exchange Act Release No. 34-82825, supra, 83 
FR at 10938-41.
    \10\ See id. at 10938-39.
    \11\ See id. at 10939.
    \12\ As the Commission noted in its order approving M-ELO, the 
minimum quantity and post-only order functionalities that the 
Exchange offers provide for similar conditionality. See id. See also 
SR-NASDAQ-2017-074 Amendment No. 2, at 19 (Oct. 30, 2017) (citing 
similarity between M-ELO and the Nasdaq BX Retail Price Improvement 
order type, which, as described in BX Rule 4702(b), is an order type 
that executes only against a retail order and only if its price is 
at least $0.001 better than the NBBO).
    \13\ Securities Exchange Act Release No. 34-82825, supra, 83 FR 
at 10940.
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    The Exchange also believes that its proposal is consistent with 
Regulation National Market System Rule 612, which provides that ``[n]o 
national securities exchange, national securities association, 
alternative trading system, vendor, or broker or dealer shall display, 
rank, or accept from any person a bid or offer, an order, or an 
indication of interest in any NMS stock priced in an increment smaller 
than $0.01 if that bid or offer, order, or indication of interest is 
priced equal to or greater than $1.00 per share.'' \14\ The Exchange 
believes that its proposal is consistent with Rule 612 because a M-ELO 
with PIO is a non-displayed order that the Exchange does not accept or 
rank at a sub-penny increment. Although a M-ELO with PIO guarantees at 
least a half-penny of price improvement relative to a member's 
designated limit price, the Exchange does not believe that this feature 
should be construed as the Exchange accepting a M-ELO with a price that 
is implicitly a half-penny below the limit price. The ability to 
execute a M-ELO with PIO and the extent of the price improvement it 
ultimately provides depends upon variables that include the movement of 
the midpoint of the NBBO relative to the limit price and the spread of 
the NBBO. At the time that a member enters a M-ELO with PIO, neither 
the member nor the Exchange knows whether or at what price the order 
will execute at the conclusion of the Holding Period. Even if a member 
is amenable to or specifically intends for a M-ELO with PIO to execute 
at a half-penny below the limit price, this outcome is not assured and 
it is out of the member's control. The order may not execute at all or, 
if it does so, it may provide the member with price improvement of a 
full penny or more. Because the ultimate terms of a M-ELO with PIO are 
unknowable at the time of acceptance and because a sub-penny execution 
price is only one of a range of possible outcomes for a M-ELO with PIO, 
a M-ELO with PIO should be deemed to be consistent with Rule 612.
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    \14\ 17 CFR 242.612.
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    Moreover, the Exchange notes that the Commission itself stated 
expressly, when it first adopted Rule 612, that the Rule does not 
prohibit midpoint orders or price improvement orders that merely result 
in sub-penny executions:
    Rule 612 will not prohibit a sub-penny execution resulting from a 
midpoint or volume-weighted algorithm or from price improvement, so 
long as the execution did not result from an impermissible sub-penny 
order or quotation. The Commission believes at this time that trading 
in sub-penny increments does not raise the same concerns as sub-penny 
quoting. Sub-penny executions do not cause quote flickering and do not 
decrease depth at the inside quotation. Nor do they require the same 
systems capacity as would sub-penny quoting. In addition, sub-penny 
executions due to price improvement are generally beneficial to retail 
investors.\15\
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    \15\ Securities Exchange Act Release No. 34-51808 (Jun. 9, 
2005), 70 FR 37496, 37556 (Jun. 29, 2005).
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    The Exchange does not believe that a M-ELO with PIO that executes 
at a sub-penny price would implicate any of the concerns that underlie 
Rule 612. For example, it would not cause quote flickering because a M-
ELO with PIO is hidden and, by definition, it does not affect displayed 
quotes. Also, the Exchange does not expect that the addition of PIO 
would cause widespread system capacity issues that the Commission 
feared would result from sub-penny quoting. The Exchange notes that the 
universe of M-ELOs and M-ELO PIOs is limited because these orders will 
interact only with each other and not with the broader population of 
orders.

[[Page 23981]]

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 Exchange believes that the addition of the Price Improvement 
Only variation will only boost the attractiveness of the M-ELO among 
market participants who desire or require additional trading 
flexibility for the M-ELO as well as those that seek additional 
opportunities for price improvement. Accordingly, the Exchange expects 
that its proposal will draw new market participants to Nasdaq and 
increase the extent to which existing participants utilize M-ELO. To 
the extent the proposed change is successful in attracting additional 
market participants, Nasdaq believes that the proposed change will 
promote competition among trading venues by making Nasdaq a more 
attractive trading venue for long-term investors and therefore capital 
formation.
    In any event, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily choose 
between competing venues if they deem participation in Nasdaq's market 
is no longer desirable. In such an environment, the Exchange must 
carefully consider the impact that any change it proposes may have on 
its participants, understanding that it will likely lose participants 
to the extent a change is viewed as unfavorable by them. Because 
competitors are free to modify the incentives and structure of their 
markets, the Exchange believes that the degree to which modifying the 
market structure of an individual market may impose any burden on 
competition is limited.
    The Exchange also does not believe that its proposal will impose an 
undue burden on intramarket competition. Just as with an ordinary M-
ELOs [sic], the M-ELO with PIO will be available to all Nasdaq members 
and it will be available on an optional basis. Thus, any member that 
seeks to avail itself of the benefits of a M-ELO with PIO or avoid its 
costs can choose accordingly. Although the proposal provides 
flexibility and price improvement opportunities specifically for 
investors that select the M-ELO order type, the Exchange believes that 
all market participants will benefit to the extent that this proposal 
contributes to a healthy and attractive market that is attentive to the 
needs of all types of investors.

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 such 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 [email protected]. Please include 
File Number SR-NASDAQ-2018-038 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-2018-038. 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-2018-038 and should be submitted 
on or before June 13, 2018.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10973 Filed 5-22-18; 8:45 am]
 BILLING CODE 8011-01-P


