[Federal Register Volume 85, Number 47 (Tuesday, March 10, 2020)]
[Notices]
[Pages 13962-13965]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04788]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88320; File No. SR-NASDAQ-2020-011]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rules 4702(b)(14) and 
(b)(15) To Shorten the Holding Period Requirements for Midpoint 
Extended Life Orders and Midpoint Extended Life Orders Plus Continuous 
Book

March 4, 2020.
    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 February 26, 2020, 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 Rules 4702(b)(14) and (b)(15) of the 
Exchange's Rulebook to shorten the holding period requirements for 
Midpoint Extended Life Orders and Midpoint Extended Life Orders Plus 
Continuous Book.
    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 the most significant aspects of such 
statements.

[[Page 13963]]

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 Rules 4702(b)(14) and (15) of the 
Exchange's Rulebook to shorten the holding period requirements for its 
Midpoint Extended Life Order (``M-ELO'') and Midpoint Extended Life 
Order Plus Continuous Book (``M-ELO+CB'') Order Types.
    In 2018, the Exchange introduced the M-ELO, which is a Non-
Displayed Order priced at the Midpoint between the National Best Bid 
and Offer (``NBBO'') and which is eligible for execution only against 
other eligible M-ELOs and only after a minimum of one-half second 
passes from the time that the System accepts the order (the ``Holding 
Period'').\3\ In 2019, the Exchange introduced the M-ELO+CB, which 
closely resembles the M-ELO, except that a M-ELO+CB may execute at the 
midpoint of the NBBO, not only against other eligible M-ELOs (and M-
ELO+CBs), but also against Non-Displayed Orders with Midpoint Pegging 
and Midpoint Peg Post-Only Orders (``Midpoint Orders'') that rest on 
the Continuous Book for at least one-half second and have Midpoint 
Trade Now enabled.\4\ For both M-ELOs and M-ELO+CBs, the Holding Period 
is the same length of time.
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    \3\ See Securities Exchange Act Release No. 34-82825 (March 7, 
2018), 83 FR 10937 (March 13, 2018) (SR-NASDAQ-2017-074) (``M-ELO 
Approval Order'').
    \4\ See Securities Exchange Act Release No. 34-86938 (September 
11, 2019), 84 FR 48978 (September 17, 2019) (SR-NASDAQ-2019-048) 
(``M-ELO+CB Approval Order'').
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    When the Exchange designed M-ELO, it set the length of the Holding 
Period at one-half second because it determined that this time period 
would be sufficient to ensure that likeminded investors would interact 
only with each other, and with minimal market impacts. Additionally, 
the Exchange chose one-half second because it was then, and it remains 
today, a time period that is significantly longer than the delay 
mechanisms that other exchanges employ for similar purposes, such as 
the IEX 350 microsecond speed bump. The Exchange believed that the 
longer length of the M-ELO Holding Period and its simplicity in design 
would provide greater protection for participants than they could 
achieve through competing delay mechanisms.
    Although the Holding Period requirement is a key design element of 
both the M-ELO and the M-ELO+CB, the length of that Holding Period is 
not sacrosanct. After adopting the M-ELO, the Exchange studied the 
actual use and performance of M-ELOs, as well as customer feedback, and 
make refinements, as necessary, to improve its operation and 
effectiveness. Indeed, such study and feedback is what prompted the 
Exchange last year to introduce the M-ELO+CB Order Type as well as to 
enhance M-ELO by permitting odd-lot order sizes.\5\
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    \5\ See Securities Exchange Act Release No. 34-86416 (July 19, 
2019), 84 FR 35918 (July 25, 2019) (SR-NASDAQ-2019-044).
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    Now, after observing M-ELO and M-ELO+CB trading over the past two 
years, and after gathering feedback from market participants, in 
particular those that trade with a longer time horizon and who are 
concerned with market impact, the Exchange has determined that the 
length of the Holding Period can and should be re-calibrated. Although 
the Exchange designed M-ELO and M-ELO+CB for use by market participants 
that are less concerned with achieving rapid executions of their Orders 
than are other participants, that is not to say that M-ELO and M-ELO+CB 
users are indifferent about the length of time in which their M-ELOs 
and M-ELO+CBs must wait before they are eligible for execution. Indeed, 
participants have informed the Exchange that in certain circumstances, 
such as when they seek to trade symbols that on average have a lower 
time-to-execution than a half-second, they are reticent to enter M-ELOs 
or M-ELO+CBs because even though they want the protections that M-ELO 
and M-ELO+CB provide, the associated Holding Periods for these Order 
Types are too long and present countervailing risks. That is, the 
Holding Periods are longer than necessary and, during the residual 
portion of the Holding Periods, participants risk losing out on 
favorable execution opportunities that would otherwise be available to 
them had they placed a non-MELO order. The Exchange also notes that 
many institutional routing strategies recalibrate using a ``heatmap'' 
where they will route an order based on where trade activity is 
occurring, at times; this recalibration occurs prior to the completion 
of the M-ELO and M-ELO+CB Holding Periods. For such participants, the 
opportunity cost of missed execution opportunities may outweigh the 
protective benefits that M-ELOs and M-ELO+CBs provide.
    Based upon this feedback, the Exchange studied the potential 
effects of reducing the length of the Holding Periods for both M-ELOs 
and M-ELO+CBs (as well as for Midpoint Orders that would execute 
against M-ELO+CBs). Ultimately, the Exchange determined that it could 
reduce the Holding Periods to 10 milliseconds without compromising the 
protective power that M-ELO and M-ELO+CB are intended to provide to 
participants and investors. Indeed, the Exchange examined each of its 
historical M-ELO executions to determine at what Midpoints of the NBBO 
the M-ELOs would have executed if their Holding Periods had been 
shorter than one-half second (500 milliseconds). After examining the 
historical effects of shorter Holding Periods of between 10 
milliseconds and 400 milliseconds, the Exchange determined that a 
reduction of the M-ELO Holding Period to as short as 10 milliseconds 
would have caused an average impact on markouts of only 0.10 basis 
points (across all symbols). In other words, compared to the execution 
price of an average M-ELO with a one-half second Holding Period, the 
Exchange found that a M-ELO with a 10 millisecond Holding Period would 
have had an average post-execution impact that was only a tenth of a 
basis point per share--a difference in protective effect that is 
immaterial.\6\ Thus, the Exchange determined that shortening the 
Holding Periods to 10 milliseconds for M-ELOs and M-ELO+CBs would 
increase the efficacy of the mechanism while not undermining the power 
of those Order Types to fulfill their underlying purpose of minimizing 
market impacts. The Exchange notes that, even at a length of 10 
milliseconds, the Holding Periods still will be as or more effective 
than the delay mechanisms that competing exchanges employ, such that 
the M-ELO and M-ELO+CB would remain among the highest-performing order 
types available to market participants. At the same time, the Exchange 
determined that a reduction in the Holding Periods to 10 milliseconds 
would dramatically add to the circumstances in which M-ELOs and M-
ELO+CBs would be useful to participants. Accordingly, the Exchange 
proposes to amend Rules 4702(b)(14) and (15) to decrease to 10 
milliseconds the length of the Holding Periods for M-ELOs and M-ELO+CB, 
along with the length of the corresponding resting period for Midpoint 
Orders on the Continuous Book that are eligible to interact with M-
ELO+CBs.
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    \6\ See Nasdaq, ``The Midpoint Extended Life Order (M-ELO); M-
ELO Holding Period,'' available at https://www.nasdaq.com/articles/the-midpoint-extended-life-order-m-elo%3A-m-elo-holding-period-2020-02-13 (analyzing effects of shortened Holding Periods on M-ELO 
performance).

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[[Page 13964]]

    The Exchange intends to make the proposed change effective for M-
ELOs and M-ELO+CBs in the Second Quarter of 2020. The Exchange will 
publish a Trader Alert at least 14 days in advance of making the 
proposed change effective.
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, 
by allowing for more widespread use of M-ELOs and M-ELO+CBs.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    When the Commission approved the M-ELO and the M-ELO+CB, it 
determined that these Order Types are consistent with the Act because 
they ``could create additional and more efficient trading opportunities 
on the Exchange for investors with longer investment time horizons, 
including institutional investors, and could provide these investors 
with an ability to limit the information leakage and the market impact 
that could result from their orders.'' \9\ Nothing about the Exchange's 
proposal should cause the Commission to revisit or rethink this 
determination. Indeed, the proposal will not alter the fundamental 
design of these Order Types, the manner in which they operate, or their 
effects.
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    \9\ M-ELO Approval Order, supra 83 FR at 10938-39; M-ELO+CB 
Approval Order, supra, 84 FR at 48980.
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    Even with shortened 10 millisecond Holding Periods, M-ELOs and M-
ELO+CBs will continue to provide their users with protection against 
information leakage and adverse selection--and they will do so at 
levels which are substantially undiminished from that which they 
provide now.\10\ The 10 millisecond Holding Periods, moreover, will 
remain longer than any delay mechanisms which the Exchange's 
competitors presently employ.
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    \10\ See note 6, supra.
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    At the same time, however, the proposal will benefit market 
participants and investors by reducing the opportunity costs of 
utilizing M-ELOs and M-ELO+CBs. The proposal, in other words, will re-
calibrate the lengths of the Holding Periods so that M-ELOs and M-
ELO+CBs will operate in the ``Goldilocks'' zone--their Holding Periods 
will not be so short as to render them unable to provide meaningful 
protections against information leakage and adverse selection, but the 
Holding Periods also will not be too long so as to cause participants 
and investors to miss out on favorable execution opportunities. Nasdaq 
believes the proposal will render M-ELOs and M-ELO+CBs more useful and 
attractive to market participants and investors, and this increased 
utility and attractiveness, in turn, will spur an increase in M-ELO and 
M-ELO+CB use cases on the Exchange, both from new and existing users of 
M-ELOs and M-ELO+CBs. Ultimately, the proposal should enhance market 
quality by opening up more use cases for midpoint executions on the 
Exchange.
    The Exchange notes that use of M-ELOs and M-ELO+CBs remains 
voluntary for all market participants. Accordingly, if any market 
participant feels that the shortened Holding Period is still too long 
or too short or because competing venues offer more attractive delay 
mechanisms, then the participants are free to pursue other trading 
strategies or utilize other trading venues. They need not utilize M-
ELOs or M-ELO+CBs.
    Finally, the Exchange notes that it will continue to conduct real-
time surveillance to monitor the use of M-ELOs and M-ELO+CBs to ensure 
that such usage remains appropriately tied to the intent of the Order 
Types. If, as a result of such surveillance, the Exchange determines 
that the shortened Holding Periods do not serve their intended 
purposes, or adversely impact market quality, then the Exchange will 
seek to make further re-calibrations.

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. To the contrary, the Exchange 
believes that this proposal will promote the competitiveness of the 
Exchange by rendering its M-ELO and M-ELO+CB Order Types more 
attractive to participants.
    The Exchange adopted the M-ELO and M-ELO+CB as pro-competitive 
measures intended to increase participation on the Exchange by allowing 
certain market participants that may currently be underserved on 
regulated exchanges to compete based on elements other than speed. The 
proposed change continues to achieve this purpose. With shortened 10 
millisecond Holding Periods, both M-ELOs and M-ELO+CBs will afford 
their users with a level of protection from information leakage and 
adverse selection that is not materially different from what they 
presently provide.\11\ At the same time, the shortened Holding Period 
will increase opportunities to interact with other like-minded 
investors with longer time horizons while also lowering the opportunity 
costs for participants that utilize M-ELOs and M-ELO+CBs, particularly 
for securities that trade within the ``Goldilocks'' zone. In sum, the 
proposed changes will not burden competition, but instead may promote 
competition for liquidity in M-ELOs and M-ELO+CBs by broadening the 
circumstances in which market participants may find such Orders to be 
useful. With the proposed changes, market participants will be more 
likely to determine that the benefits of entering M-ELOs and M-ELO+CBs 
outweigh the risks of doing so.
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    \11\ See id.
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    The proposed change will not place a burden on competition among 
market venues, as any market may adopt an order type that operates 
similarly to a M-ELO or a M-ELO+CB with a 10 millisecond Holding 
Period.

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 the 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:

[[Page 13965]]

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-2020-011 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-2020-011. 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-2020-011, and should be submitted 
on or before March 31, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04788 Filed 3-9-20; 8:45 am]
BILLING CODE 8011-01-P


