[Federal Register Volume 87, Number 159 (Thursday, August 18, 2022)]
[Notices]
[Pages 50902-50905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95495; File No. SR-NASDAQ-2022-047]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule Nasdaq Equity 6, Section 5

August 12, 2022.
    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 8, 2022, 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, II, 
and III, 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 Rule Nasdaq Equity 6, Section 5 
(Risk Settings) to provide Participants with additional optional 
settings.
    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 purpose of the proposed rule changes under Rule Nasdaq Equity 
6, Section 5 (Risk Settings) is to provide Participants \3\ with 
additional optional settings to assist them in their efforts to

[[Page 50903]]

manage risk on their order flow. These additional settings provide 
participants with extra oversight and controls on orders coming into 
the exchange. Once the optional risk controls are set, the Exchange is 
authorized to take automated action if a designated risk level for a 
Participant is exceeded. Such risk settings would provide Participants 
with enhanced abilities to manage their risk with respect to orders on 
the Exchange.
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    \3\ Pursuant to Rule Nasdaq Equity 1, Section 1(a)(5), a 
``Participant'' is defined as an entity that fulfills the 
obligations contained in Equity 2, Section 3 regarding participation 
in the System, and shall include: (1) ``Nasdaq ECNs,'' members that 
meet all of the requirements of Equity 2, Section 14, and that 
participates in the System with respect to one or more System 
Securities; (2) ``Nasdaq Market Makers'' or ``Market Makers'', 
members that are registered as Nasdaq Market Makers for purposes of 
participation in the System on a fully automated basis with respect 
to one or more System securities; and (3) ``Order Entry Firms,'' 
members that are registered as Order Entry Firms for purposes of 
entering orders in System Securities into the System. This term 
shall also include any Electronic Communications Network or 
Alternative Trading System (as such terms are defined in Regulation 
NMS) that fails to meet all the requirements of Equity 2, Section 
14.
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    All proposed risk settings are optional for Participants and afford 
flexibility to Participants to select their own risk tolerance levels. 
The proposed new and amended risk settings are as follows.
    The Exchange is proposing to add an additional risk setting titled 
``Restricted Stock List.'' This control allows a Participant to 
restrict the types of securities transacted by setting a list of 
symbols for which orders cannot be entered. This control also allows to 
set an easy to borrow list, which is a list of symbols for which short 
sale orders may be entered. Orders for symbols not on the easy to 
borrow list will not be accepted; however, Participants will have an 
option to indicate that short sales orders are permitted for all 
symbols. This setting is similar to Interpretations and Policies .01(d) 
of BZX Rule 11.13.\4\
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    \4\ See Securities Exchange Act Release No. 80611 (May 5, 2017) 
82 FR 22045 (May 11, 2017) (SR-BatsBZX-2017-24).
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    The Exchange is proposing to add an additional risk setting titled 
``ADV Check.'' This control relates to the size of an order as compared 
to the 20 day consolidated average daily volume \5\ (ADV) of the 
security and allows a Participant to set a specified percent of ADV 
that an order size cannot exceed. This control also allows a 
Participant to specify the minimum value on which such control is based 
if the average daily volume of the securities is below such value. This 
setting is similar to Interpretations and Policies .01(g) of BZX Rule 
11.13.
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    \5\ In certain circumstances, when the security does not have 20 
days of trading history, the ADV Check is calculated on fewer than 
20 data points.
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    The Exchange is proposing to add an additional risk setting titled 
``Fat Finger Protection.'' This control relates to the limit price of 
an order as compared to the NBBO and includes both percentage-based and 
dollar-based controls. If the limit price of an order deviates from the 
NBBO in excess of the amount set by a Participant (either percentage or 
dollar based), the order will not be accepted. This setting is similar 
to Interpretations and Policies .01(b) of BZX Rule 11.13.
    The Exchange is proposing to add an additional risk setting titled 
``Rate Thresholds Check.'' A Participant will be able to set the 
maximum number of messages (other than cancellations, but including new 
orders, replacement orders and modifications) that can be sent in 
during a configurable one second time window set by the Exchange. This 
control can be set as a port level or per symbol. This setting is 
similar to Interpretations and Policies .01(f) of BZX Rule 11.13.
    The Exchange is proposing to add an additional risk setting titled 
``Gross Exposure Check.'' This control measures open, executed, or 
notional exposure of a Participant on the Exchange; and, when breached, 
prevents submission of all new orders and, optionally, will cancel all 
open orders. Gross open order exposure is measured as the sum of booked 
price times size for all open orders plus the sum of booked price times 
size for all open sell orders. Gross executed order exposure is 
measured as the sum of all executed buy and sell orders. Gross notional 
order exposure is measured as the sum of the gross open exposure and 
gross executed exposure. This setting is similar to Interpretations and 
Policies .01(h) of BZX Rule 11.13.
    The Exchange is proposing to add an additional risk setting titled 
``Market Impact Check.'' This optional control, if enabled, will result 
in the rejection of a Participant's incoming limit order if the limit 
price of the order is priced through the far-side of the current LULD 
bands. In other words, a buy (sell) order cannot be priced more 
aggressively than the upper (lower) LULD band.\6\ The Exchange notes 
that pursuant to the existing LULD requirements, buy orders priced 
below the lower price bands (and vice versa for sell orders) will be 
accepted and are eligible for inclusion in the NBBO; however, these 
orders are outside the price bands and will be non-executable. If the 
price bands move in such a way that an order that was previously 
outside the price band is now inside the band, the order will become 
executable.
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    \6\ The Limit Up-Limit Down (LULD) mechanism is intended to 
prevent trades in National Market System (NMS) securities from 
occurring outside of specified price bands. The bands are set at a 
percentage level above and below the average reference price of the 
security over the immediately preceding five-minute period. To 
accommodate fundamental price moves, there is a five-minute trading 
pause if trading is unable to occur within the specified price band 
after 15 seconds.
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    The Exchange believes that this new optional setting is similar to 
the Exchange's existing Limit Order Protection (``LOP''). LOP is a 
feature of the Nasdaq Market Center that prevents certain Limit Orders 
at prices outside of pre-set standard limits (``LOP Limit'') from being 
accepted by the System.\7\ LOP is operational each trading day, except 
for orders designated for opening, re-opening, closing and halt 
crosses. LOP does not apply in the event that there is no established 
LOP Reference Price.\8\ LOP is applicable on all order entry 
protocols.\9\ While the current LULD functionality would continue to 
apply, this additional proposed risk setting would allow a Participant 
to manage its risk more comprehensively.
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    \7\ The LOP Limit is the greater of 10% of the LOP Reference 
Price or $0.50 for all securities across all trading sessions. The 
LOP Reference Price is the current National Best Bid or Best Offer, 
the bid for sell orders and the offer for buy orders.
    \8\ For example, if there is a one-sided quote or if the NBB, 
when used as the LOP Reference Price, is equal to or less than 
$0.50.
    \9\ Nasdaq maintains several communications protocols for 
Participants to use in entering Orders and sending other messages to 
the Nasdaq Market Center, such as: OUCH, RASH, QIX, FLITE and FIX.
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    The Exchange is also proposing to amend two existing risk settings 
titled, ISO Control and Duplication Control.
    Currently, pursuant to Nasdaq Equity 6, Section 5(j), the 
Duplication control will automatically reject an order that a 
Participant submits to the Exchange to the extent that it is 
duplicative of another order that the Participant submitted to the 
Exchange during the prior five seconds. The Exchange proposes to 
provide additional flexibility for Participants by allowing the 
interval applicable to this risk check to vary from one to thirty 
seconds, as set by a Participant. This setting is similar to 
Interpretations and Policies .01(e) of BZX Rule 11.13.
    Pursuant to Nasdaq Equity 6, Section 5(b), ISO Control setting 
prevents a Participant from entering an ISO order onto the Exchange. 
The Exchange proposes to expand this setting to allow a Participant to 
restrict additional order types from being entered. Specifically, a 
Participant may restrict their ability to place any of the following: 
ISO Orders (as currently provided by this risk setting), short sale 
orders, non-auction market orders, pre-market orders or post-market 
orders. The Exchange proposes to change the title of this risk setting 
to Order Type/Attribution Check to better reflect its substance, as 
amended. This setting is similar to Interpretations and Policies .01(c) 
of BZX Rule 11.13.
    As currently provided for existing risk settings, the Exchange will 
share any Participant risk settings in the trading system that are 
specified Rule Nasdaq Equity 6, Section 5, with the clearing member 
that clears transactions on

[[Page 50904]]

behalf of the Participant even if the clearing member is not 
designated.
Implementation
    The Exchange intends to implement of the proposed rule changes on 
or before December 30, 2022. The Exchange will issue an Equity Trader 
Alert to members announcing the exact date the Exchange will implement 
the risk protections.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes the proposed amendment will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because it provides functionality 
for a Participant to manage its risk exposure, while also maintaining a 
notification system under Rule Nasdaq Equity 6, Section 5 that would 
help to ensure the Participant and its clearing member are aware of 
developing issues.
    A clearing member guarantees transactions executed on Nasdaq for 
members with whom it has entered into a clearing arrangement, and 
therefore bears the risk associated with those transactions. The 
Exchange therefore believes that it is appropriate for the clearing 
member to have knowledge of what risk settings the Participant may 
utilize within the Exchange's trading system, as well as the option to 
set and adjust the risk levels. The proposal will permit clearing 
members who have a financial interest in the risk settings of 
Participants with whom the Participants have entered into clearing 
arrangements to better monitor and manage the potential risks assumed 
by clearing members, thereby providing clearing members with greater 
control and flexibility over setting their own risk tolerance and 
exposure and aiding clearing members in complying with the Act.
    In addition, the Exchange believes that the proposed amendments 
under Rule Nasdaq Equity 6, Section 5, are designed to protect 
investors and the public interest because the proposed functionalities 
are a form of risk mitigation that will aid Participants and clearing 
members in minimizing their financial exposure and reduce the potential 
for disruptive, market-wide events. The proposed new:
     Gross Executed Check settings are appropriate measures to 
serve as an additional tool for Participants and clearing members to 
assist them in identifying open, executed, or notional exposure risk;
     Market Impact Check and ADV check may assist Participants 
in avoiding placing orders with unintentional market impact;
     Rate Thresholds Check may help alert a Participant to 
excessive message traffic that could affect technical port performance;
     Fat Finger Protection will assist a Participant in 
avoiding submission of orders with unintended price limits or share 
sizes;
     Restricted Stock List will assist a Participant in 
limiting trading for a particular security.
    The proposed amendments to ISO Control will a Participant prevent 
trading in a particular order type by expanding the types of orders 
subject to this check to pre-market, post-market, short sales, non-
auction market orders. The proposed amendments to the Duplication 
Control will allow a Participant additional flexibility in using this 
control by letting a Participant to choose the period of time over 
which this control applies.
    The Exchange also believes the proposed amendments will assist 
Participants and clearing members in managing their financial exposure 
which, in turn, could enhance the integrity of trading on the 
securities markets and help to assure the stability of the financial 
system.
    Finally, the Exchange believes that the proposed rule changes do 
not unfairly discriminate among the Exchange's Participants because use 
of the risk settings under Rule Nasdaq Equity 6, Section 5 are optional 
and available to all Participants, and not a prerequisite for 
participation on the Exchange.

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. In fact, the Exchange believes 
that the proposal will have a positive effect on competition because, 
it would allow the Exchange to offer risk management functionality that 
is comparable to functionality being offered by other national 
securities exchanges. Moreover, by providing Participants and their 
clearing members additional means to monitor and control risk, the 
proposed rule may increase confidence in the proper functioning of the 
markets and contribute to additional competition among trading venues 
and broker-dealers. Rather than impede competition, the proposal is 
designed to facilitate more robust risk management by Participants and 
clearing members, which, in turn, could enhance the integrity of 
trading on the securities markets and help to assure the stability of 
the financial system.

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)(iii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 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:

[[Page 50905]]

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-NASDAQ-2022-047 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-2022-047. 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-2022-047 and should be submitted 
on or before September 8, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17746 Filed 8-17-22; 8:45 am]
BILLING CODE 8011-01-P


