[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57929-57932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23548]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87391; File No. SR-NASDAQ-2019-057]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend Rule 4121

October 23, 2019.

I. Introduction

    On July 16, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Nasdaq Rule 4121 (Trading Halts Due to 
Extraordinary Market Volatility) to enhance the re-opening auction 
process for Nasdaq-listed securities following trading halts due to 
extraordinary market volatility. The proposed rule change was published 
for comment in the Federal Register on July 25, 2019.\3\ On September 
5, 2019, the Commission extended the time period within which to either 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change, to October 23, 2019.\4\ The Commission 
received no comment letters on the proposed rule change. This order 
institutes proceedings under Section 19(b)(2)(B) of the Act to 
determine whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86412 (July 19, 
2019), 84 FR 35900 (``Notice'').
    \4\ See Securities Exchange Act Release No. 86875 (September 11, 
2019), 84 FR 47998.
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II. Background and Description of the Proposal

    The Exchange has proposed to amend the re-opening auction process 
for Nasdaq-listed securities following trading halts due to 
extraordinary market volatility (``market-wide circuit breakers'').\5\ 
Currently, after a Level 1 or Level 2 market-wide circuit breaker 
trading halt initiated under Nasdaq Rule 4121 (``MWCB Halt''), trading 
in Nasdaq-listed securities would resume on the Exchange through a Halt 
Cross.\6\ Additionally, the Exchange would extend the Display Only 
Period for an additional 1-minute period if there is volatility during 
the Display Only Period (i.e., an order imbalance in the security). The 
volatility checks are governed under Nasdaq Rule 4120(c)(7)(C)(1) and 
(2), and provide that the Display Only Period will be extended if: (i) 
The expected cross price moves the greater of 5% or 50 cents, or (ii) 
all market orders will not be executed in the cross.
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    \5\ The Exchange also proposes a number of formatting clean-ups 
in Nasdaq Rule 4121. See Notice, supra note 3, at 35903.
    \6\ In particular, Nasdaq Rule 4121(c)(i) provides that the re-
opening of trading following a Level 1 or Level 2 trading halt shall 
follow the procedures set forth in Nasdaq Rule 4120. The Exchange 
states that these procedures are set forth in Nasdaq Rule 4120(c)(7) 
(see Notice, supra note 3, at 35901), which provides, in relevant 
part, for a 5-minute Display Only Period during which market 
participants may enter quotes and orders in Nasdaq systems, at the 
conclusion of which trading will immediately resume through the Halt 
Cross under Nasdaq Rule 4753.
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    The Exchange proposes modifications to its rules that would allow 
it to instead follow a process it believes is similar to that described 
in Nasdaq Rule 4120(c)(10) for releasing a security

[[Page 57930]]

following a Trading Pause initiated pursuant to the Plan to Address 
Extraordinary Market Volatility (``LULD'' or ``LULD Plan'').\7\ 
Proposed paragraph (d) to Nasdaq Rule 4121 provides that an MWCB Halt 
shall be terminated when Nasdaq releases the security for trading. For 
any such security listed on Nasdaq, prior to terminating the MWCB Halt, 
there will be a 15-minute ``Initial Display Only Period'' during which 
market participants may enter quotations and orders in that security in 
Nasdaq systems. The Initial Display Only Period will be 15 minutes in 
duration to coincide with the entire duration of an MWCB Halt.
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    \7\ The Exchange believes that its LULD re-opening process has 
been effective in facilitating a fair and orderly market following 
Trading Pauses initiated pursuant to the LULD Plan, and believes it 
is implementing similar functionality for trading halts in Nasdaq-
listed securities following the initiation of market-wide circuit 
breakers. The Exchange further believes that the proposed changes 
would promote price formation and provide a more consistent re-
opening process for members and investors following such trading 
halts, similar to the current implementations for re-opening 
following an MWCB Halt on NYSE Arca, Inc. (``Arca'') and Cboe BZX 
Exchange, Inc. (``BZX''). See Notice, supra note 3, at 35900-01.
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    Proposed Nasdaq Rule 4121(d)(1)(A) provides that during the Initial 
Display Only Period, the Exchange will also establish the ``Auction 
Reference Price,'' which is the Nasdaq last sale price (either round or 
odd lot) after 9:15 a.m. Eastern Time but prior to the MWCB Halt and, 
if none, the prior trading day's Nasdaq Official Closing Price.\8\
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    \8\ The Exchange believes its proposal is similar to the current 
implementations on Arca and BZX for re-openings following an MWCB 
Halt. See Arca Rule 7.35-E(a)(8)(A) and BZX Rule 11.23(a)(9). The 
Exchange states that the proposed Auction Reference Price for MWCB 
Halts is substantially similar to Arca's and BZX's auction reference 
prices, except the Exchange will use the last Nasdaq sale price 
prior to the MWCB Halt, as opposed to the last consolidated price. 
The Exchange believes that it is appropriate to use the price of a 
trade on the primary listing market to set the reference price for 
auctions in Nasdaq-listed securities when such a trade has been 
executed recently. See Notice, supra note 3, at 35902.
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    Proposed Nasdaq Rule 4121(d)(1)(B) describes how the Exchange would 
calculate the upper and lower MWCB Auction Collar prices during the 
Initial Display Period. The lower MWCB Auction Collar is derived by 
subtracting from the Auction Reference Price 10% of the Auction 
Reference Price, or in the case of securities with an Auction Reference 
Price of $5 or less, $0.50. The upper MWCB Auction Collar is derived by 
adding to the Auction Reference Price 10% of the Auction Reference 
Price, rounded to the nearest minimum price increment, or in the case 
of securities with an Auction Reference Price of $5 or less, $0.50.\9\
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    \9\ The Exchange notes that both Arca and BZX employ narrower 
auction collar thresholds (5% of the auction reference price, or 
$0.15 for securities with an auction reference price of $3 or less). 
See Arca Rule 7.35-E(e)(7)(B)(ii) and BZX Rule 11.23(d)(2)(C)(i)(B). 
The Exchange believes that the wider parameters proposed for MWCB 
Auction Collars are set at appropriate levels that would allow the 
Exchange to re-open trading in securities more quickly while still 
reducing the potential to re-open at a price that is significantly 
away from the last traded price of the security. The Exchange also 
notes that it has traditionally been a listing venue for equity 
stocks, while Arca and BZX have traditionally listed more ETFs, 
which track entire sectors, indices or other groups of assets and 
can mute the effect of price volatility of the ETF. The Exchange 
believes that the proposed wider price bands strikes an appropriate 
balance between allowing the Exchange to return to normal continuous 
trading in a measured, timely manner while accommodating the 
potential higher volatility of individual stocks. See Notice, supra 
note 3, at 35902.
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    Proposed Nasdaq Rules 4121(d)(2) and (d)(3) specify the 
circumstances when the Exchange would extend the Display Only Period 
for an MWCB Halt re-opening process, and how the Exchange would adjust 
the MWCB Auction Collars for each extension. In particular, at the 
conclusion of the Initial Display Only Period, the security will be 
released for trading unless, at the end of the Initial Display Only 
Period, Nasdaq detects an order imbalance in the security. In that 
case, Nasdaq will extend the Display Only Period for an additional 5-
minute period (``Extended Display Only Period''), and the MWCB Auction 
Collar prices will be adjusted as follows:
     If the Display Only Period is extended because the 
calculated price at which the security would be released for trading is 
below the lower MWCB Auction Collar price or all sell market orders 
would not be executed in the cross, then the new lower MWCB Auction 
Collar price is derived by subtracting 10% of the Auction Reference 
Price, which was rounded to the nearest minimum price increment, or in 
the case of securities with an Auction Reference Price of $5 or less, 
$0.50, from the previous lower MWCB Auction Collar price, and the upper 
MWCB Auction Collar price will not be changed.
     If the Display Only Period is extended because the 
calculated price at which the security would be released for trading is 
above the upper MWCB Auction Collar price or all buy market orders 
would not be executed in the cross, then the new upper MWCB Auction 
Collar price is derived by adding 10% of the Auction Reference Price, 
which was rounded to the nearest minimum price increment, or in the 
case of securities with an Auction Reference Price of $5 or less, 
$0.50, to the previous upper MWCB Auction Collar price, and the lower 
MWCB Auction Collar price will not be changed.
    At the conclusion of the Extended Display Only Period, the security 
will be released for trading unless, at the end of the Extended Display 
Only Period, Nasdaq detects an order imbalance in the security. In that 
case, Nasdaq will further extend the Display Only Period, continuing to 
adjust the MWCB Auction Collar prices every five minutes in the manner 
described in proposed Nasdaq Rule 4121(d)(2) until the security is 
released for trading; provided, however, that Nasdaq will not adjust 
the MWCB Auction Collar prices past 50% of the Auction Reference Price 
for any security during any Extended Display Only Period.\10\ During 
any additional Extended Display Only Period after the first Extended 
Display Only Period, Nasdaq shall release the security for trading at 
the first point there is no order imbalance.
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    \10\ The Exchange notes that the proposal to limit the MWCB 
Auction Collars to 50% of the Auction Reference Price deviates from 
the implementations of MWCB auction collars on Arca and BZX, neither 
of which limit the auction collars. The Exchange states that it 
balanced the potential for the proposed 50% limit to prevent the 
transition to continuous trading, particularly in instances of 
extreme price volatility that could result in increased Extended 
Display Only Periods against the potential for extreme volatility 
resulting in trades at prices far away from a security's fundamental 
value, which could ultimately harm parties to the trade. The 
Exchange believes that an MWCB Halt will be triggered during a 
period of significant volatility across markets that may not 
correlate to the fundamental value of a single security and that 
limiting the MWCB Auction Collars to 50% of the Auction Reference 
Price achieves an appropriate balance in favor of preventing 
extraordinary volatility that could result in significant price 
disparity in post-auction trading. See Notice, supra note 3, at 
35903.
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    Proposed Nasdaq Rule 4121(d)(4) specifies that an order imbalance 
would be established for purposes of the process under Nasdaq Rule 4121 
as follows:
     The calculated price at which the security would be 
released for trading is above (below) the upper (lower) MWCB Auction 
Collar price calculated under paragraphs (1), (2), or (3) of Nasdaq 
Rule 4121(d); or
     all market orders would not be executed in the cross.
    Proposed Nasdaq Rule 4121(d)(5) describes how the MWCB Auction 
Collars will function in the event of more than one trading halt 
initiated under Nasdaq Rule 4121 in the same day. In the event of a 
Level 2 Market Decline while a security is in a Level 1 MWCB Halt and 
has not been released

[[Page 57931]]

for trading, Nasdaq will recalculate the lower and upper MWCB Auction 
Collar prices in the particular security in accordance with paragraph 
(B)(1) of proposed Nasdaq Rule 4121.\11\ In this instance, the Exchange 
will start the calculation of the new upper and lower MWCB Auction 
Collar prices using 10% of the Auction Reference Price, rounded to the 
nearest minimum price increment, or $0.50 for securities with an 
Auction Reference Price of $5 or less. The Exchange believes that the 
proposed language would bring greater transparency to market 
participants in how the Exchange would handle the calculation of MWCB 
Auction Collars.
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    \11\ As currently provided in Nasdaq Rule 4121(b)(i), the 
Exchange would halt trading based on a Level 1 or Level 2 Market 
Decline only once per day.
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    The Exchange also proposes to add new paragraph (e) to Nasdaq Rule 
4121 to describe how the Exchange will handle the publication of MWCB 
Halt Information. Specifically, at the beginning of the Initial Display 
Only Period and continuing through the resumption of trading, Nasdaq 
will disseminate by electronic means an Order Imbalance Indicator \12\ 
every second. The Exchange also proposes to make a related change by 
adding new Nasdaq Rule 4753(a)(3)(G), which will provide that for 
purposes of an MWCB Halt initiated pursuant to Nasdaq Rule 4121, the 
Order Imbalance Indicator will include Auction Reference Prices and 
MWCB Auction Collars, as defined in Nasdaq Rule 4121(d).
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    \12\ As described in Nasdaq Rule 4753(a)(3), an ``Order 
Imbalance Indicator'' is a message disseminated by electronic means 
containing information about Eligible Interest and the price at 
which such interest would execute at the time of dissemination. 
``Eligible Interest'' is defined as any quotation or any order that 
has been entered into the system and designated with a time-in-force 
that would allow the order to be in force at the time of the Halt 
Cross. See Nasdaq Rule 4753(a)(5).
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III. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2019-057 
and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposal should be 
approved or disapproved.\13\ Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
disapproval proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis and input concerning the proposed rule change's consistency 
with the Act \14\ and, in particular, with Section 6(b)(5) of the Act, 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, 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.\15\
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Act to determine whether the proposal should be approved or 
disapproved.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is inconsistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulation thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\16\
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    \16\ Section 19(b) (2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 19, 2019. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 3, 2019. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal 
which are set forth in the Notice,\17\ in addition to any other 
comments they may wish to submit about the proposed rule change. In 
particular, the Commission seeks comment, including where relevant, any 
specific data, statistics, or studies, on the following:
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    \17\ See Notice, supra note 3.
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    1. The Nasdaq proposal appears to differ from other primary listing 
market MWCB re-opening processes in three ways. First, the Nasdaq 
proposal would establish a security's auction reference price after a 
MWCB Halt by referring to the Nasdaq last sale price (as opposed to the 
consolidated last sale price). Second, the Nasdaq proposal would 
establish wider price bands of 10% of the Auction Reference Price, or 
in the case of securities with an Auction Reference Price of $5 or 
less, $0.50 (as opposed to 5% of the auction reference price, or $0.15 
for securities with an auction reference price of $3), and would widen 
the price bands in those larger increments (as opposed to widening in 
the smaller increments). Third, the Nasdaq proposal would not widen the 
price bands for an individual security beyond 50% (as opposed gradually 
widening price bands without limit until a security is reopened). 
Should the primary listing exchanges harmonize their respective 
processes for reopening trading after a halt pursuant to the market-
wide circuit breaker mechanism following a Level 1 or Level 2 Market 
Decline, and if so, why? If so which aspects of the re-opening 
processes should be harmonized (e.g., period of auction order entry, 
type of auction information disseminated, length of dissemination 
period, frequency of dissemination, auction reference price, 
determination of auction match price, width of auction collars, reasons 
for extending auction, length of auction extension period, thresholds 
for expanding auction collars, or limits on expansion of auction 
collars) and what are the appropriate parameters? Should Nasdaq further 
harmonize its proposed MWCB reopening process to align with Arca and 
BZX on establishment of auction reference prices, auction collars 
levels, and/or the limit (or lack thereof) on auction collar 
adjustments?
    2. Is it appropriate for the Exchange to derive and expand the 
lower/upper MWCB Auction Collar by subtracting from/adding to the 
Auction Reference Price 10% of the Auction Reference Price (or $0.50 
for securities priced $5 or less), which are currently wider than

[[Page 57932]]

the parameters that Arca and BZX use to derive and expand their 
respective MWCB auction collars? Are there any specific data, 
statistics, or studies to support the Exchange's belief that (1) the 
wider parameters proposed for MWCB Auction Collars are set at 
appropriate levels that would allow the Exchange to re-open trading in 
securities more quickly while still reducing the potential to re-open 
at a price that is significantly away from the last traded price of the 
security and (2) the wider parameters are appropriate because the 
Exchange has traditionally been a listing venue for equity stocks as 
contrasted with Arca and BZX which have traditionally listed more ETFs, 
which can mute the effect of price volatility? \18\
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    \18\ See Notice, supra note 3, at 35902.
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    3. Is it appropriate for the Exchange to not adjust the MWCB 
Auction Collar prices past 50% of the Auction Reference Price for any 
security during any Extended Display Only Period? Are there any 
specific data, statistics, or studies to support the Exchange's belief 
that (1) without this limitation, there is potential for extreme 
volatility resulting in trades at prices far away from a security's 
fundamental value, ultimately harming investors that are party to the 
trade and (2) it may be more appropriate to continue adjusting price 
collars in the context of LULD where trading is halted due to a period 
of extraordinary volatility in a single security because there may be 
instances of a discrete event that ultimately impacts the value of the 
individual security and that an MWCB Halt will be triggered during a 
period of significant volatility across markets that may not correlate 
to the fundamental value of a single security? \19\
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    \19\ See id. at 35903.
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    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-2019-057 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-2019-057. 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-2019-057 and 
should be submitted on or before November 19, 2019. Rebuttal comments 
should be submitted by December 3, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23548 Filed 10-28-19; 8:45 am]
 BILLING CODE 8011-01-P


