[Federal Register Volume 83, Number 174 (Friday, September 7, 2018)]
[Notices]
[Pages 45476-45479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19376]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84012; File No. SR-BX-2018-040]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Provide New 
Optional Functionality to Minimum Quantity Orders

August 31, 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 August 20, 2018, Nasdaq BX, Inc. (``BX'' 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 provide new optional functionality to 
Minimum Quantity Orders.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqbx.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 Exchange is proposing to provide a new optional functionality 
to the Minimum Quantity Order Attribute,\3\ which is identical to the 
optional functionality provided by The Nasdaq Stock Market LLC 
(``Nasdaq'').\4\
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    \3\ Rule 4703(e).
    \4\ See Nasdaq Rule 4703(e); see also Securities Exchange Act 
Release No. 73959 (Dec. 30, 2014), 80 FR 582 (Jan. 6, 2015) (SR-
NASDAQ-2014-95).
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Current Functionality
    An Order designated with the Minimum Quantity Order Attribute 
(``MQ'') allows a market participant to specify a minimum share amount 
at which it will execute. For example, a market participant seeking to 
buy or sell a large position may desire to execute only if a large 
quantity of shares can be traded to reduce the price impact of the 
security being bought or sold. An Order with MQ will not execute unless 
the volume of contra-side liquidity available to execute against the 
order meets or exceeds the designated minimum. When an Order with MQ is 
received by the Exchange, it will execute immediately \5\ if there is 
sufficient liquidity available on the Exchange within the limit price 
of the Order with MQ. Specifically, the Order with MQ will execute if 
the sum of the shares of one or more resting Orders is equal to or 
greater than its minimum quantity. In the case of multiple resting 
Orders being aggregated to meet the minimum quantity, each contra-side 
order creates a separate execution and thus there can be multiple 
executions that, in aggregate, equal or exceed the minimum quantity. If 
an Order with MQ does not execute immediately due to lack of contra-
side liquidity that is equal to or greater than the designated minimum, 
the Order will post \6\ to the Exchange book as a Non-Displayed Order 
with the characteristics of its underlying Order Type.\7\ Once posted, 
an Order with MQ will execute only if an incoming Order is marketable 
against the resting Order with MQ and is equal to or greater than the 
minimum quantity set on the resting Order with MQ. Multiple potential 
executions cannot be aggregated to meet the minimum quantity 
requirement of the posted Order with MQ. If an Order with MQ executes 
partially and the number

[[Page 45477]]

of shares remaining is less than the minimum quantity of the Order, the 
minimum quantity of the Order is reduced to the remaining share size. 
If an Order with MQ is received that is marketable against a resting 
contra-side Order with size that does not meet the minimum quantity 
requirement, the Order with MQ will be posted on the Exchange book as a 
Non-Displayed Order with the characteristics of its underlying Order 
Type.\8\ For example, if an Order with MQ is received to buy 1,000 
shares at $10 with a minimum quantity restriction of 500 shares and 
there is a resting sell order for 300 shares at $10, the Order with MQ 
will be posted as a Non-Displayed Order at $10. Furthermore, the 
Exchange notes that a subsequent Order without a minimum quantity 
restriction that is marketable against the resting contra-side interest 
will result in an execution because the market participant entering the 
Order with MQ has expressed its intention not to execute against 
liquidity below a certain minimum size, and therefore cedes execution 
priority to any new Orders that would otherwise have a lower priority.
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    \5\ An Order with MQ would satisfy the requirements of 
Regulation NMS Rule 611 and not trade through a protected quotation. 
See 17 CFR 242.611.
    \6\ Orders post to the Exchange book only if they are designated 
with a time in force that allows for posting. For example, an IOC 
order never posts to the book.
    \7\ A Non-Displayed Order is an Order Type that is not displayed 
to other Participants, but nevertheless remains available for 
potential execution against incoming Orders until executed in full 
or cancelled. See Rule 4702(b)(3). Orders with MQ are always Non-
Displayed when posted on the Exchange book.
    \8\ SEC Rule 610(d) under Regulation NMS restricts displayed 
quotations that lock or cross protected quotations in NMS stock, but 
does not apply to non-displayed trading interest, like a resting 
Order with MQ. See 17 CFR 242.610(d).
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Proposed Functionality
    The Exchange is proposing to add a new optional functionality to 
further enhance the utility of the Minimum Quantity Order Attribute to 
market participants.\9\ As was noted by Nasdaq in proposing the 
optional functionality proposed herein,\10\ some market participants 
have noted that they avoid sending large Orders with MQ to the Exchange 
out of concern that such Orders may interact against small Orders 
entered by professional traders. These market participants are 
concerned that such interaction may negatively impact the execution of 
their larger Orders. Often institutional Orders are much larger in size 
than the average Order in the marketplace. Furthermore, in order to 
facilitate the liquidation or acquisition of a large position, multiple 
Orders are submitted into the market, which although larger than the 
average Order in the market, only represent a small proportion of the 
overall institutional position to be executed. The various strategies 
used to execute large size are based on a desire to limit price 
movement of the stock the institution is pursuing. Executing in small 
sizes, even if in aggregate it meets a minimum quantity designation, 
may impact the market such that the additional Orders that the 
institution has yet to submit to the market may be more costly to 
execute. If an institution is able to execute in larger sizes, the 
contra-party to the execution is less likely to be a participant that 
reacts to short term changes in the stock price and as such the price 
impact to the stock could be less acute when larger individual 
executions are obtained by the institution.\11\ As a consequence of 
this concern, these Orders are often executed away from the Exchange in 
dark pools, at least some of which have the functionality proposed 
herein,\12\ or via broker-dealer internalization.
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    \9\ The option is available at the port level. Accordingly, all 
Orders entered through a particular port will receive the selected 
functionality. All trading ports default to the current 
functionality.
    \10\ See note 4, supra.
    \11\ The Commission has long recognized this concern: ``Another 
type of implicit transaction cost reflected in the price of a 
security is short-term price volatility caused by temporary 
imbalances in trading interest. For example, a significant implicit 
cost for large investors (who often represent the consolidated 
investments of many individuals) is the price impact that their 
large trades can have on the market. Indeed, disclosure of these 
large orders can reduce the likelihood of their being filled.'' See 
Securities Exchange Act Release No. 42450 (Feb. 23, 2000), 65 FR 
10577, 10581 (Feb. 28, 2000) (SR-NYSE-99-48) (emphasis added) 
(internal citation omitted).
    \12\ For example, the BIDS Alternative Trading System also has 
functionality that allows its subscribers to select a minimum size 
requirement, which prevents a subscriber's interest from interacting 
with contra-side interest if its size is less than the specified 
minimum. See http://www.bidstrading.com/solutions/faqs/.
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    Accordingly, to attract larger Orders with MQ to the Exchange, it 
is proposing new optional functionality that will allow a market 
participant to designate a minimum individual execution size, and thus 
allow users to avoid interaction with such smaller Orders resting on 
the book. As discussed above, under the current rule, an incoming Order 
with MQ will execute against any number of smaller contra-side Orders 
that, in aggregate, meet the minimum quantity set by the market 
participant. For example, if a market participant entered an Order with 
MQ to buy with a price of $10, a size of 1,000 and a minimum quantity 
of 500, and the order was marketable against two resting sell orders 
for 300 and 400 shares, the System would aggregate both orders for 
purposes of meeting the minimum quantity, thus resulting in executions 
of 300 shares and 400 shares respectively with the remaining 300 shares 
of the Order with MQ posting to the Exchange book with a minimum 
quantity restriction of 300 shares. The proposed new optional 
functionality will not allow aggregation of smaller executions to 
satisfy the minimum quantity of an incoming Order with MQ. Using the 
same scenario as above, but with the proposed new functionality and a 
minimum execution size requirement of 400 shares selected by the market 
participant, the Order with MQ would not execute against the two sell 
orders because the order at the top of the Exchange book is less than 
400 shares. The new functionality will reprice the Order with MQ to one 
minimum price increment lower than (higher than) the lowest price 
(highest price) of the resting contra-side Order, and post the Order to 
the Exchange book as a Non-Displayed Order when the top of the Exchange 
book is of insufficient size to satisfy the minimum execution size 
requirement. Applied to the example above, the Order would post to the 
Exchange book as a Non-Displayed Order to buy 1,000 shares at $9.99. 
The Exchange notes that the market participant entering the Order with 
MQ has expressed its intention not to execute against liquidity below a 
certain minimum size, and therefore cedes execution priority when it 
would lock or cross resting Orders against which it would otherwise 
execute if it were not for the minimum execution size restriction.
    The Exchange believes that it is appropriate to adjust the price 
one minimum price increment lower than (higher than) the lowest price 
(highest price) of the resting contra-side Order prior to posting on 
the Exchange book because, by using the minimum execution size option, 
the submitter of the Order is choosing to reduce the number of 
situations in which the Order could potentially execute. Thus, an Order 
without this further restriction provides greater contribution to the 
price discovery process of the market. All bona fide market 
participation that results in an execution on a data feed contributes 
to the price discovery process that is essential to a proper 
functioning market. However, there are different degrees to which 
activity within the market contributes to price discovery. A displayed 
Order at the NBBO of an Exchange, and the subsequent execution thereof, 
contributes significantly to price discovery because both the Displayed 
Order prior to execution, and the execution itself, provide a reference 
price to the market. Further, a non-displayed order on an exchange 
contributes to price discovery as it is part of the continuous auction 
on a market with publicly displayed orders and quotes--albeit the 
contribution of a non-displayed order on an exchange is

[[Page 45478]]

less than the contribution of a displayed order on an exchange. 
Furthermore, a non-displayed order on a dark pool contributes less to 
price discovery because it is resting in a less transparent trading 
venue that is not part of the continuous auction of a lit exchange. If 
one were to rank the contribution to price discovery that different 
market activity provides, it would include the following (listed from 
least price discovery contribution to most):

[ssquf] Order resting in dark pool (no contribution)
[ssquf] Non-displayed order on exchange (no or very little 
contribution)
[ssquf] Order execution in dark pool (some contribution, execution 
reported publicly via TRF)
[ssquf] Non-displayed order execution on exchange (contribution as part 
of continuous auction, execution reported publicly, and priority is 
behind displayed--i.e., priority is ceded to orders that contribute 
more to price discovery)
[ssquf] Displayed order on exchange (significant contribution)
[ssquf] Displayed order execution on exchange (significant 
contribution, publicly displayed order + execution reported publicly)

In this sense, the proposed change continues to contribute more 
meaningfully to price discovery than an order in a dark pool because it 
is part of the continuous auction market on the exchange but, similar 
to a regular Non-Displayed Order ceding priority to Displayed Orders on 
the Exchange, the Order with MQ that uses the proposed functionality 
will cede price priority to Orders that do not contain the minimum 
execution size restriction. Also unlike the current process, the 
proposed new functionality will cancel the remainder of a marketable 
Order with MQ that is partially filled upon entry if the partially-
executed Order with MQ would lock or cross resting contra-side 
liquidity that does not meet the minimum execution size requirement. 
Under the current process, an Order with MQ that receives a partial 
execution has the remainder of the Order posted to the Exchange book as 
a Non-Displayed Order. The proposed new functionality will, instead, 
cancel any shares not executed after a partial execution of an Order 
with MQ if there are more shares that remain resting on the Exchange 
book at a price that would satisfy the limit price of the Order with MQ 
but that are not executable against the incoming Order with MQ due to 
the minimum execution size set on the Order. For example, an Order with 
MQ to buy priced at $10 with a size of 1,000 and a minimum quantity of 
500, that is marketable against two sell orders on the Exchange book, 
one for 500 shares and one for 400 shares, would result in the 
execution of 500 shares and the cancellation of the remaining 500 
shares. Under the current process, the Order would receive two partial 
executions of 500 and 400 shares, and the remaining 100 shares would be 
posted to the Exchange book as a Non-Displayed Order to buy priced at 
$10.
    The Exchange notes that when a non-IOC Order with MQ is partially 
executed and cancelled in this situation, the contra-side liquidity 
that is not executed may be Non-Displayed. If an Order with MQ is 
cancelled due to Non-Displayed contra-side liquidity, the submitter of 
the Order will know that there may be a resting Order or Orders at the 
price of the Order with MQ and also that the resting Order or Orders 
are for fewer shares than the minimum execution size required by the 
Order. The Exchange believes this is acceptable because the Order with 
MQ has already partially executed for a size of at least one round lot 
and thus the Order submitter has taken on risk due to the execution and 
therefore contributed to price discovery in the market place.
    Under the proposed change, a resting Order with MQ will operate the 
same way as it does currently. When an Order with MQ is posted on the 
book, it will only execute against incoming Orders if the individual 
incoming Order is equal to or greater than the minimum designated on 
the Order. The primary difference between the current functionality and 
the proposed new functionality is that upon receipt, an incoming Order 
with MQ will only execute against individual resting Orders if the 
order at the top of the Exchange book meets or exceeds the minimum on 
the Order. The Exchange notes that this is no different than Nasdaq's 
Minimum Quantity Order Attribute, on which the proposed change is 
based, and is also similar to Cboe BZX Exchange, Inc.'s (``BZX'') 
Minimum Quantity Order,\13\ which allows BZX Users to specify that such 
an order will not execute against multiple aggregated orders 
simultaneously and that the minimum quantity condition be satisfied by 
each individual order resting on the BZX book.
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    \13\ See BZX Rule 11.9(c)(5).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\15\ 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. The proposal will provide market participants, including 
institutional firms that ultimately represent individual retail 
investors in many cases, with better control over their Orders, thereby 
providing them with greater potential to improve the quality of their 
Order executions. Currently, the rule allows the market participant to 
designate a minimum quantity on an Order that, upon entry, may 
aggregate multiple executions to meet the minimum quantity requirement. 
Once posted to the Exchange book, however, the minimum quantity 
requirement is equivalent to a minimum execution size requirement. The 
Exchange is now proposing to provide a market participant with control 
over the execution of their Order with MQ by allowing them an option to 
designate the minimum individual execution size upon entry. The control 
offered by the proposed change is consistent with the various types of 
control currently provided by exchange order types. For example, the 
Exchange, Nasdaq and other exchanges offer limit orders, which allow a 
market participant control over the price it will pay or receive for a 
stock.\16\ Similarly, exchanges offer order types that allow market 
participants to structure their trading activity in a manner that is 
more likely avoid certain transaction cost related economic 
outcomes.\17\ Moreover, and as discussed above, other trading venues 
provide the very functionality that the Exchange is proposing, with the 
proposed rule text and operation of the functionality identical to that 
of Nasdaq.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See, e.g., Rule 4703(c).
    \17\ See, for example, the Exchange's Post-Only Order. See Rule 
4702(b)(4).
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    As discussed above, some market participants have requested the 
functionality proposed herein so they may avoid transacting with 
smaller Orders that they believe ultimately increase the cost of the 
transaction. Market participants, such as large institutions that 
transact a large number of orders on behalf of retail investors, have 
noted that because the Exchange does not have this functionality, they 
avoid sending large orders to the Exchange to avoid potentially more

[[Page 45479]]

expensive transactions.\18\ In this regard, the Exchange notes that 
proposed new optional functionality may improve the Exchange market by 
attracting more Order flow, which is currently trading on less 
transparent venues that contribute less to price discovery and price 
competition than executions and quotes that occur on lit exchanges. 
Such new Order flow will further enhance the depth and liquidity on the 
Exchange, which supports just and equitable principles of trade. 
Furthermore, the proposed modification to the Minimum Quantity Order 
Attribute is consistent with providing market participants with greater 
control over the nature of their executions so that they may achieve 
their trading goals and improve the quality of their executions.
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    \18\ As noted, the proposal is designed to attract liquidity to 
the Exchange by allowing market participants to designate a minimum 
size of contra-side Order with which to interact, thus providing 
market participants with functionality that is otherwise available 
to them on another exchange (i.e., Nasdaq). The designation of a 
minimum size may reduce the interaction that such new Order flow 
would have with smaller contra-side Orders on the Exchange, some of 
which may be retail Order flow. The Exchange notes that since the 
Order flow attracted by this functionality may also represent retail 
investors and is in addition to the existing Order flow currently on 
the Exchange, market quality for retail investors ultimately should 
not be negatively impacted. Accordingly, the Exchange does not 
believe that retail Orders will be disadvantaged by the proposed 
change.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposed change allows market participants to 
condition the processing of their Orders based on a minimum execution 
size. The changes to the Minimum Quantity Order Attribute will enhance 
the functionality offered by the Exchange to its members, thereby 
promoting its competitiveness with other exchanges and non-exchange 
trading venues that already offer the same or similar functionality. As 
a consequence, the proposed change will promote competition among 
exchanges and their peers, which, in turn, will decrease the burden on 
competition rather than place an unnecessary burden thereon.

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 \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 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 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: (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 [email protected]. Please include 
File Number SR-BX-2018-040 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-BX-2018-040. 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-BX-2018-040 and should be submitted on 
or before September 28, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
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    \21\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-19376 Filed 9-6-18; 8:45 am]
 BILLING CODE 8011-01-P


