[Federal Register Volume 85, Number 250 (Wednesday, December 30, 2020)]
[Notices]
[Pages 86598-86599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28891]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90793; File No. SR-NASDAQ-2020-090]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Equity 4, Section 
4703

December 23, 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 December 15, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' 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 amend Equity 4, Section 4703, as described 
below.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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 proposes to amend Equity 4, Section 4703(h), which 
describes Orders with ``Reserve Size,'' \3\ to clarify its existing 
practice relating to replenishments of such Orders. As set forth in 
Section 4703(h), ``Reserve Size'' is an Order Attribute that permits a 
Participant to stipulate that an Order Type that is Displayed may have 
its displayed size replenished from additional non-displayed size.\4\
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    \3\ Securities Exchange Act Release No. 34-79290 (November 10, 
2016), 81 FR 81184 (November 17, 2016) (SR-NASDAQ-2016-111).
    \4\ An Order with Reserve Size may be referred to as a ``Reserve 
Order.''
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    The Exchange established the Reserve Orders with the intention that 
it would always act as a provider of liquidity upon replenishment. 
Indeed, this is what participants have come to expect from the 
operation of Reserve Orders.
    In late 2016, however, a rule filing introduced a rare circumstance 
where a Reserve Order, upon replenishment of its Displayed Order 
component, theoretically could become a liquidity remover under the 
existing Exchange Rules.
    An example of the rare theoretical circumstance is as follows. 
Order 1 is a Price to Comply Order to buy at $10.00 resting on the 
Nasdaq book with 100 shares displayed and 3,000 shares in reserve (for 
a total order size of 3,100 shares). Order 2 is an Order to sell 100 
shares at $10.00, which executes against the 100 displayed shares from 
Order 1 upon entry. Order 3 is a Post Only order to sell 1,000 shares 
at $10.00 that is entered and posts to the Book before Order 1 has been 
replenished. Following the rules of the Post Only Order Type, Order 3 
does not execute against the non-displayed interest resting at $10.00, 
but instead posts at the locking price. Therefore, upon replenishment, 
the new 100 shares of Order 1 would lock Order 3 at $10.00. As directed 
by the rule governing Price to Comply Orders,\5\ Order 1 would execute 
against Order 3 at $10.00 as a liquidity taker.
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    \5\ Pursuant to Equity 4, Section 4702(b)(1)(A), a ``Price to 
Comply Order'' is an Order Type designed to comply with Rule 610(d) 
under Regulation NMS by avoiding the display of quotations that lock 
or cross any Protected Quotation in a System Security during Market 
Hours. The Price to Comply Order is also designed to provide 
potential price improvement. When a Price to Comply Order is 
entered, the Price to Comply Order will be executed against 
previously posted Orders on the Exchange Book that are priced equal 
to or better than the price of the Price to Comply Order, up to the 
full amount of such previously posted Orders, unless such executions 
would trade through a Protected Quotation.
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    The Exchange did not account for this scenario when drafting its 
rules. In fact, the Exchange does not presently handle this scenario as 
described above. Instead, upon replenishment, the Exchange reprices the 
new displayed Price to Comply Order such that it does not execute 
against Order 3 as a liquidity taker.
    However, the Exchange now proposes to eliminate any unintended 
inconsistency as to how it handles this scenario and make clear in its 
Rules that a Reserve Order is an adder of liquidity after posting on 
the Nasdaq Book in all circumstances. Specifically, the Exchange 
proposes to amend the Rule to state that if the new Displayed Order 
would lock an Order that posted to the Nasdaq Book before replenishment 
can occur, the Displayed Order will post at the locking price if the 
resting Order is Non-Display or will be repriced, ranked, and displayed 
at one minimum price increment lower (higher) than the locking price if 
the resting order to sell (buy) is Displayed.6 7
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    \6\ The Exchange notes that a Reserve Order that does not 
execute fully upon initial order entry will behavior in the same 
manner as described in this Proposal if the Displayed portion of the 
Reserve Order would lock or cross a resting Displayed Order upon 
entry.
    \7\ If a Displayed Order posts to the Nasdaq Book and locks a 
resting Non-Displayed Order with the Trade Now attribute enabled, 
then consistent with the definition of Trade Now, as set forth in 
Equity 4, Section 4703(m), the Trade Now functionality would apply 
and the Non-Displayed Order would be able to execute against the 
locking Displayed Order as a liquidity taker. If a locked Non-
Displayed Order does not have the Trade Now attribute enabled, then 
new incoming orders will be eligible to execute against the 
Displayed Order.

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[[Page 86599]]

    Again, in the above example, the proposed rule will prevent Order 1 
from becoming a liquidity remover because upon replenishment, the new 
Displayed Order will not attempt to execute against Order 3, but 
instead it will post to the Nasdaq Book and display at a price of 
$9.99, while the remaining 2,900 non-display shares in reserve will 
remain posted at $10.00.
    By posting new Displayed Orders without attempting to execute, the 
Displayed Order will avoid removing liquidity upon replenishment.\8\
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    \8\ The Exchange proposes to correct a non-substantive 
typographical error in the existing rule text by removing the word 
``the'' from the following sentence: ``For example, if a Price to 
Comply Order with Reserve Size . . . and the 150 shares. . . .''
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change is consistent with the Act because it will 
help ensure that the Exchange's Rule governing Reserve Orders will be 
consistent with the original intention of the Exchange and the 
expectation of participants that such Orders, after posting on the 
Nasdaq Book, will always be liquidity providers and not liquidity 
takers. It would also ensure that the Exchange's Order Types operate 
the same way during a race condition as they do during normal 
conditions. The proposal would eliminate any ambiguity under the 
existing rules as to whether a Reserve Order would take liquidity when 
a locking order posts to the Exchange book prior to the Reserve Order 
completing its replenishment (or prior to the Displayed portion of a 
Reserve Order posting to the Exchange Book for the first time). Thus, 
the proposal would ensure that the Exchange's Rules are transparent and 
clear about how the System processes Reserve Orders.
    Finally, the proposal is consistent with the Act because it would 
correct a non-substantive typographical error in the Rule text, which 
will improve its readability and clarity, to the benefit of the public 
and investors.

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. Again, Exchange intends for the 
proposed rule change to only eliminate an inconsistency as to how it 
handles a rare circumstance that causes the System to process Reserve 
Orders in an unintended manner. The Exchange does not anticipate this 
proposal will have any impact on competition whatsoever.

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:

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-2020-090 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-2020-090. 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-2020-090 and should be submitted 
on or before January 29, 2021.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-28891 Filed 12-29-20; 8:45 am]
BILLING CODE 8011-01-P


