[Federal Register Volume 85, Number 48 (Wednesday, March 11, 2020)]
[Notices]
[Pages 14252-14256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04913]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88322; File No. SR-BX-2020-003]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Correct and 
Clarify Rules 4702(b)(3)(B) and 4703(d)

March 5, 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, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to a proposal to correct and clarify Rules 
4702(b)(3)(B) and 4703(d).
    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.

[[Page 14253]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rules 4702 and 4703 to correct and 
clarify its various descriptions of the circumstances in which the 
Exchange will cancel certain types of midpoint pegged Orders \3\ after 
they post to the Exchange Book \4\ and the National Best Bid and 
National Best Offer (``NBBO'') or the Inside Bid and Inside Offer 
subsequently shifts.\5\ The Exchange intended for these descriptions to 
be consistent and comprehensive, but upon review, they are somewhat 
discordant and confusing.
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    \3\ Pursuant to Rule 4701(e), the term ``Order'' means an 
instruction to trade a specified number of shares in a specified 
System Security submitted to the System by a Participant. An ``Order 
Type'' is a standardized set of instructions associated with an 
Order that define how it will behave with respect to pricing, 
execution, and/or posting to the Exchange Book when submitted to the 
System. An ``Order Attribute'' is a further set of variable 
instructions that may be associated with an Order to further define 
how it will behave with respect to pricing, execution, and/or 
posting to the Exchange Book when submitted to the System.
    \4\ Pursuant to Rule 4701(a)(1), the ``Exchange Book'' refers to 
a montage for Quotes and Orders that collects and ranks all Quotes 
and Orders submitted by Participants. The term ``Quote'' means a 
single bid or offer quotation submitted to the System by a Market 
Maker or Equities ECN and designated for display (price and size) 
next to the Participant's MPID in the Exchange Book. See Rule 
4701(d).
    \5\ Pursuant to Rule 4703(d), the terms ``Inside Bid'' and 
``Inside Offer'' mean the price to which an Order is pegged for 
purposes of Rule 4703. The term ``Midpoint'' means the midpoint of 
the NBBO or the Inside Bid and Inside Offer.
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    In 2015, the Exchange restated its Rules that describe its Order 
Types (Rule 4702) and Attributes (Rule 4703).\6\ Among the topics that 
the restated Rules described were the circumstances in which the 
Exchange cancels orders priced at the Midpoint of the NBBO (the Inside 
Bid and the Inside Offer) or priced at their limit price when the NBBO 
(the Inside Bid and the Inside Offer) changes after the order posts to 
the Exchange Book. The Exchange described these circumstances in two 
different provisions of its Rules pertaining to Orders with Midpoint 
pegging (``Midpoint-Pegged Orders'').
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    \6\ See Securities Exchange Act Release No. 34-75291 (June 24, 
2015), 80 FR 37698 (July 1, 2015) (SR-BX-2015-015).
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    First, in Rule 4702(b)(3)(B), the Exchange states as follows in 
describing the cancellation of a Non-Displayed Order with a Midpoint 
Pegging Order Attribute assigned to it:
    If a Non-Displayed Order entered through OUCH or FLITE is assigned 
a Midpoint Pegging Order Attribute, and if, after being posted to the 
Exchange Book, the NBBO changes so that the Non-Displayed Order is no 
longer at the Midpoint between the NBBO, the Non-Displayed Order will 
be cancelled back to the Participant. In addition, if a Non-Displayed 
Order entered through OUCH or FLITE is assigned a Midpoint Pegging 
Attribute and also has a limit price that is lower than the midpoint 
between the NBBO for an Order to buy (higher than the midpoint between 
the NBBO for an Order to sell), the Order will nevertheless be accepted 
at its limit price and will be cancelled if the midpoint between the 
NBBO moves lower than (higher than) the price of an Order to buy 
(sell).

Second, in describing the Midpoint Pegging Attribute, Rule 4703(d) 
explains when the Exchange will cancel an Order with this Attribute 
enabled:

    An Order entered through OUCH or FLITE with Midpoint Pegging will 
have its price set upon initial entry to the Midpoint, unless the Order 
has a limit price that is lower than the Midpoint for an Order to buy 
(higher than the Midpoint for an Order to sell), in which case the 
Order will be ranked on the Exchange Book at its limit price. 
Thereafter, if the NBBO changes so that: the Midpoint is lower than 
(higher than) the price of an Order to buy (sell), the Pegged Order 
will be cancelled back to the Participant.
    The Exchange intended for these two Rules to be substantively 
identical. That is, the Rules should have provided for the Exchange to 
cancel Midpoint-Pegged Orders in the same circumstances when entered 
through OUCH or FLITE. Upon review, however, the Exchange has 
determined that the Rules provide somewhat opaque descriptions of the 
circumstances in which a change in the NBBO/Inside Bid and Inside Offer 
will and will not result in the cancellation of a Midpoint-Pegged 
Order. Each Rule states that the Exchange will cancel an Order to buy 
(sell) if, after entry, the NBBO/Inside Bid and Inside Offer shifts so 
that the Midpoint is lower (higher) than the price of the buy (sell) 
Order. However, these descriptions in the Rules do not clearly 
distinguish between Midpoint-Pegged Orders that post to the Exchange 
Book at the Midpoint of the NBBO/Inside Bid and Inside Offer (i.e., 
orders with limit prices more aggressive than the Midpoint) from those 
Orders that post to the Book at their limit prices (i.e., orders with 
limit prices at or less aggressive than the Midpoint). In the former 
case, any post-entry shift in the Midpoint of the NBBO/Inside Bid and 
Inside Offer will result in cancellation of the Order. In the latter 
case, however, a post-entry shift in the Midpoint of the NBBO/Inside 
Bid and Inside Offer will result in cancellation only if the Midpoint 
shifts lower than (higher than) the limit price of an Order to buy 
(sell). If the Midpoint is higher than (lower than) the limit price of 
an Order to buy (sell) upon Order entry, and it remains so after 
shifting, then the Order will remain on the Book at its limit price. 
The Exchange believes that this result is implicit in the notion that 
these Order Types may post to the Exchange Book at their limit prices 
when the Midpoints are higher (lower) than the limit prices of Orders 
to buy (sell). Nevertheless, the Rules do not describe this scenario 
expressly.
    Similarly, the Rules do not distinguish the particular 
circumstances in which a crossed Inside Bid and Inside Offer will and 
will not result in a cancellation of an Order. The Midpoint Pegging 
Attribute rule simply states that the Exchange will cancel Orders when 
the Inside Bid and Inside Offer becomes crossed after these Orders are 
posted to the Exchange Book. However, the Exchange will only cancel a 
Midpoint-Pegged Order that is ranked at its limit price where the 
Inside Bid and Inside Offer become crossed, such that the Midpoint of 
the crossed quotation remains equal to or higher (lower) than the limit 
price of the Order to buy (sell), and a new sell (buy) Order is 
received at a price that locks or crosses the limit price of the 
resting Midpoint-Pegged Order. If an Order to buy (sell) posts to the 
Exchange Book at its limit price, and the Inside Bid and Inside Offer 
subsequently become crossed but the Midpoint remains equal to or higher 
than (lower than) the limit price of the Order (and there are no 
contra-side orders that lock or cross the Order), then the Exchange 
will not cancel the Order. Likewise, if a Midpoint-Pegged Order is 
ranked at the

[[Page 14254]]

Midpoint of the Inside Bid and Inside Offer and the Inside Bid and 
Inside Offer becomes crossed but the Midpoint does not change, then the 
Exchange will not cancel the order unless a new Order is received at a 
price that locks or crosses the Midpoint of the Inside Bid and Inside 
Offer.
    To address the foregoing issues and to increase clarity, the 
Exchange proposes to amend and restate Rules 4702(b)(3)(B) and 4703(d), 
as follows.
    First, the Exchange proposes to delete entirely the language of 
Rule 4702(b)(3)(B) excerpted above. This language, which again 
describes the behavior of a Non-Displayed Order with a Midpoint Pegging 
Attribute enabled, is duplicative of the general description of the 
behavior of a Midpoint Pegging Attribute in Rule 4703(d). The Exchange 
believes that the concept described in these two Rules is best stated 
only once to avoid unintended discrepancies. In this instance, the 
Exchange believes that the language is most appropriate for inclusion 
in Rule 4703(d).
    Second, the Exchange proposes to restate the relevant language of 
Rule 4703(d) as follows:
    An Order entered through OUCH or FLITE with Midpoint Pegging will 
have its price set upon initial entry to the Midpoint, unless the Order 
has a limit price, and that limit price is lower than the Midpoint for 
an Order to buy (higher than the Midpoint for an Order to sell), in 
which case the Order will be ranked on the Exchange Book at its limit 
price. The price of the Order will not thereafter be adjusted based on 
changes to the Inside Bid or Offer. However, an Order with Midpoint 
Pegging entered through OUCH or FLITE will be cancelled back to the 
Participant after initial entry and posting to the Exchange Book if any 
of the following conditions are met:
     There is no Inside Bid and/or Inside Offer;
     The Order to buy (sell) is entered with a limit price 
above (below) the Midpoint and is ranked at the Midpoint; thereafter 
the Inside Bid and/or Inside Offer change so that the Midpoint changes 
and the Order is no longer at the Midpoint;
     The Order to buy (sell) is entered at a limit price that 
is equal to or less than (greater than) the Midpoint and is ranked at 
its limit price; thereafter, the Inside Bid and/or Inside Offer change 
so that the Midpoint is lower (higher) than the limit price of the 
Order;
     The Order to buy (sell) is entered at a limit price that 
is equal to or less than (greater than) the Midpoint and is ranked at 
its limit price; thereafter, the Inside Bid and Inside Offer become 
crossed, such that the Midpoint of the crossed Quotation remains equal 
to or higher (lower) than the limit price of the Order, and then a new 
sell (buy) Order is received at a price that locks or crosses the limit 
price of the resting Order marked for Midpoint Pegging; or
     The Order to buy (sell) is entered at a limit price that 
is greater than (less than) the Midpoint and is therefore ranked at the 
Midpoint; thereafter, the Inside Bid and Inside Offer become crossed 
but the Midpoint does not change, and then a new sell (buy) Order is 
received at a price that locks or crosses the Midpoint of the Inside 
Bid and Inside Offer.
    The Exchange believes that the restated language is more precise 
than the existing language because it specifies that the Exchange will 
cancel an Order with Midpoint Pegging that posts to the Exchange Book 
at its limit price, when the Inside Bid and Inside Offer later shift, 
only when the Inside Bid and Inside Offer shift so that the Midpoint of 
the Inside Bid and Inside Offer becomes lower (higher) than the limit 
price of an Order to buy (sell). Again, where the Inside Bid and Inside 
Offer shift after the Order posts such that the Midpoint of the Inside 
Bid and Inside Offer remains or becomes higher (lower) than the limit 
price of an Order to buy (sell), cancellation of the Order is 
unnecessary because the Order can simply remain on the Exchange Book at 
its limit price. The restated language is also more precise because it 
specifies that for an Order with Midpoint Pegging with a limit price 
that is more aggressive than the Midpoint of the Inside Bid and Inside 
Offer, any change to the Midpoint will result in cancellation of the 
Order.
    Likewise, the restated language is more precise than the existing 
language in that the restated language specifies that the Exchange will 
cancel an Order with Midpoint Pegging to buy (sell) that posts at its 
limit price, when the Inside Bid and Inside Offer subsequently become 
crossed and the Midpoint of the crossed Inside Bid and Inside Offer 
remains equal to or higher (lower) than the limit price of the Order to 
buy (sell), only when a new sell (buy) Order is received at a price 
that locks or crosses the limit price of the resting Order. The 
restated language also specifies that the Exchange will cancel an Order 
with Midpoint Pegging to buy (sell) that posts at the Midpoint of the 
Inside Bid and Inside Offer, when the Inside Bid and Inside Offer 
subsequently become crossed and the Midpoint of the crossed Inside Bid 
and Inside Offer remains the same, only when the Exchange receives a 
new sell (buy) Order at a price that locks or crosses the Midpoint of 
the Inside Bid and Inside Offer. Other than in these two circumstances, 
cancellation of an Order simply because the Inside Bid and Inside Offer 
cross is unnecessary because the Order need not be re-priced. When an 
Order to buy (sell) is ranked at its limit price, and the Inside Bid 
and Inside Offer become crossed while the Midpoint remains at or above 
(below) the limit price, the crossed market does not impact the Order, 
which can still rest on the Exchange Book at its limit price because 
the Inside Bid and Inside Offer could uncross prior to the Order 
executing. Likewise, when an Order to buy (sell) is ranked at the 
Midpoint of the Inside Bid and Inside Offer, and the Inside Bid and 
Inside Offer become crossed but the Midpoint does not change, the 
crossed market also does not impact the Order, which can continue to 
rest on the Exchange Book at the Midpoint because the Inside Bid and 
Inside Offer could uncross (with the Midpoint still remaining 
unchanged) prior to the Order executing.
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 proposal will protect investors by amending Rules 4702 and 4703 
so that they will describe more clearly what the Rules currently imply 
with respect to the circumstances in which the Exchange will not cancel 
Midpoint-Pegged Orders. That is, the Exchange believes that concept of 
a limit price fairly implies that the Exchange has no need to and thus, 
it does not presently, cancel a Midpoint-Pegged Order to buy (sell) 
when such an Order is posted at its limit price and the Inside Bid and 
Inside Offer shifts thereafter but the Midpoint remains above (below) 
the limit price; however, Rule 4702(a)(3)(B) merely states that any 
post-entry shift in the Midpoint will result in the cancellation of a 
Midpoint-Pegged Order. To avoid confusion, the proposal clarifies that 
the Exchange will cancel a Midpoint-Pegged Order posted at its limit 
price if the Inside Bid and Inside Offer shifts after entry such that 
the Midpoint becomes lower (higher) than the limit price. In this 
circumstance,

[[Page 14255]]

cancellation is warranted because the Order would need to be re-priced, 
and a Midpoint-Pegged Order entered using OUCH or FLITE cannot be re-
priced. Similarly, if a Midpoint-Pegged Order posts to the Exchange 
Book at the Midpoint of the Inside Bid and Inside Offer and then the 
Midpoint shifts in either direction, the Order will be cancelled 
because it would need to be re-priced, and again, OUCH or FLITE do not 
allow for re-pricing to occur.
    Similarly, the Exchange believes that it is helpful to investors to 
clarify the circumstances in which the Exchange does and does not 
cancel Midpoint-Pegged Orders in a crossed market. Rule 4703(d) states 
generally that the Exchange will cancel Midpoint-Pegged Orders if the 
Inside Bid and Inside Offer become crossed. However, as discussed 
above, the Exchange does not need to, and thus it does not presently, 
cancel Midpoint-Pegged Orders in all such instances. Although 
cancellation is warranted to prevent Orders from actually executing in 
a crossed market,\9\ the Exchange does not believe that cancellation is 
warranted simply because the markets cross if there remains a 
possibility that the markets will uncross prior to an execution 
occurring. Thus, the Exchange proposes that it will not cancel a 
Midpoint-Pegged Order to buy (sell) when the Order is ranked at its 
limit price and the Inside Bid and Inside Offer become crossed 
thereafter (and the Midpoint remains equal to or more aggressive than 
its limit price), but no new sell (buy) Order is received that locks or 
crosses the limit price of the resting Midpoint-Pegged Order. Unless or 
until the Exchange receives a new Order that locks or crosses the limit 
price of the resting Midpoint-Pegged Order while the market remains 
crossed, cancellation is unnecessary because the Midpoint-Pegged Order 
can continue to rest at its limit price and the market may uncross 
before the Midpoint-Pegged Order executes. Likewise, as was also 
discussed above, the Exchange proposes that it will not cancel a 
Midpoint-Pegged Order that is ranked at the Midpoint of the Inside Bid 
and Inside Offer where the market becomes crossed, provided that while 
the market is crossed, the Midpoint of the crossed Inside Bid and 
Inside Offer does not change, and the Exchange does not receive a new 
Order that would lock or cross the Midpoint. Again, cancellation is 
unnecessary in this scenario because the Midpoint-Pegged Order can 
continue to rest at the Midpoint while the market is crossed and 
because the market may uncross (with the Midpoint remaining unchanged) 
prior to execution of the Order.\10\
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    \9\ See Securities Exchange Act Release No. 34-79290 (Nov. 10, 
2016), 81 FR 81184, 81186 (Nov. 17, 2016) (stating that the 
``midpoint of a crossed market is not a clear and accurate 
indication of a valid price'' and that cancellation in a crossed 
market ``would avoid mispriced executions'').
    \10\ If at any point after the Midpoint-Pegged Order posts to 
the Exchange Book at the Midpoint, the Inside Bid and Inside Offer 
changes so that the price of the Order is no longer at the Midpoint, 
then the order must be cancelled because orders entered through OUCH 
or FLITE cannot be re-priced.
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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 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange intends for the 
proposal to improve the precision with which the Rules describe the 
circumstances in which it will cancel Midpoint-Pegged Orders after 
entry, as described above. The Exchange does not expect that these 
changes will have any impact whatsoever on competition.

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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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 change 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 rule-comments@sec.gov. Please include 
File Number SR-BX-2020-003 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-2020-003. 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

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Number SR-BX-2020-003, and should be submitted on or before April 1, 
2020.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04913 Filed 3-10-20; 8:45 am]
BILLING CODE 8011-01-P


