[Federal Register Volume 77, Number 161 (Monday, August 20, 2012)]
[Notices]
[Pages 50191-50193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-20318]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67655; File No. SR-NASDAQ-2012-059]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove
Proposed Rule Change To Establish ``Benchmark Orders'' Under NASDAQ
Rule 4751(f)
August 14, 2012.
I. Introduction
On May 1, 2012, 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 establish various ``Benchmark Orders'' under
NASDAQ Rule 4751(f). The proposed rule change was published for comment
in the Federal Register on May 17, 2012.\3\ The Commission received no
comments on the proposal. On June 26, 2012, the Commission extended to
August 15, 2012, the time period in which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to disapprove the proposed rule change.\4\ 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. 66972 (May 11,
2012), 77 FR 29435 (May 17, 2012) (``Notice'').
\4\ See Securities Exchange Act Release No. 67258 (June 26,
2012), 77 FR 39314 (July 2, 2012).
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[[Page 50192]]
II. Description of the Proposal
As set forth in more detail in the Notice, the Exchange has
proposed to offer Benchmark Orders that would seek to achieve the
performance of a specified benchmark--Volume Weighted Average Price
(``VWAP''), Time Weighted Average Price (``TWAP''), or Percent of
Volume (``POV'')--over a specified period of time for a specified
security.\5\ The entering party would specify the benchmark, period of
time, and security, as well as the other order information common to
all order types, such as buy/sell side, shares and price.\6\
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\5\ See proposed NASDAQ Rule 4751(f)(15).
\6\ Id.; see also Notice, 77 FR at 29436.
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Benchmark Orders would be received by NASDAQ but by their terms
would not be executable by the NASDAQ matching engine upon entry.\7\
Rather, NASDAQ would direct them to a system application
(``Application'') that is licensed from a third-party provider and
dedicated to processing Benchmark Orders.\8\ The Application would
process Benchmark Orders by generating ``Child Orders'' in a manner
designed to achieve the desired benchmark performance, i.e., VWAP, TWAP
or POV, in accordance with the member's instructions.\9\ Child Orders
would be executed within the NASDAQ system under NASDAQ's existing
rules, or made available for routing under NASDAQ's current routing
rules.\10\ The Application would not be capable of executing Child
Orders, but instead would send Child Orders, using the proper system
protocol, to the NADAQ matching engine or to the NASDAQ router as
needed to complete the Benchmark Order.\11\ NASDAQ represents that it
considers the Application to be a functional offering of the NASDAQ
Stock Market, and that it would be integrated closely with the NASDAQ
system and provided to members subject to NASDAQ's obligations and
responsibilities as a self-regulatory organization.\12\
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\7\ See proposed NASDAQ Rule 4751(f)(15); see also Notice, 77 FR
at 29435-36.
\8\ See Notice, 77 FR at 29436.
\9\ See proposed NASDAQ Rule 4751(f)(15); see also Notice, 77 FR
at 29435-36.
\10\ See Notice, 77 FR at 29435. Child Orders that require
routing would be routed by NASDAQ Execution Services (``NES''),
NASDAQ's wholly-owned routing broker-dealer. See Notice, 77 FR at
29436 n.8. In addition, fees applicable to existing orders and
trades would apply to Child Orders. See Notice, 77 FR at 29436.
\11\ See Notice, 77 FR at 29435-36.
\12\ See Notice, 77 FR at 29436.
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NASDAQ also represents that it would test the Application
rigorously and regularly, monitor the Application performance on a
real-time and continuous basis, and have access to the technology,
employees, books and records of the third-party provider that are
related to the Application and its interaction with NASDAQ.\13\ In
addition, NASDAQ represents that it would maintain control of and
responsibility for the Application.\14\
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\13\ Id.
\14\ See Notice, 77 FR at 29437.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2012-059 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 proposed rule change
should be approved or disapproved. Institution of such proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change. Institution of these proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, as described in greater detail
below, the Commission seeks and encourages interested persons to
provide additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.
As discussed above, the Benchmark Order would allow NASDAQ members
to enter a single order in a single security that seeks to match the
performance of one of three selected benchmarks--VWAP, TWAP or POV--
over a pre-determined period of time. Benchmark Orders would not be
executed by the NASDAQ matching engine, but would be directed to the
Application that is dedicated to processing Benchmark Orders. The
Application would generate and send Child Orders to the NASDAQ matching
engine or to the NASDAQ router, pursuant to current NASDAQ order
handling and routing rules, in a manner designed to achieve the desired
benchmark selected by the entering firm.
Pursuant to Section 19(b)(2)(B), the Commission is providing notice
of the grounds for disapproval under consideration. The sections of the
Act applicable to the proposed rule change that provide the grounds for
approval or disapproval under consideration are Section 6(b)(5) \15\
and Section 6(b)(8).\16\ Section 6(b)(5) of the Act \17\ 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; and are not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act
\18\ requires that the rules of the exchange do not impose any burden
on competition not necessary or appropriate in furtherance of the Act.
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\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78f(b)(8).
\17\ 15 U.S.C. 78f(b)(5).
\18\ 15 U.S.C. 78f(b)(8).
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NASDAQ's proposal raises concerns under the Act regarding whether
Benchmark Orders and Child Orders would be subject to appropriate
controls to manage risk. In particular, the Commission is concerned
that NASDAQ has not adequately addressed how or whether Child Orders,
which would be generated solely by the Application and presumably
outside the control and supervision of the broker-dealer firm that
entered the initial Benchmark Order, would be subject to adequate pre-
trade risk checks. NASDAQ's proposal makes reference to the Market
Access Rule, Rule 15c3-5 under the Act,\19\ which requires pre-trade
controls to be applied by brokers entering orders onto an exchange but
NASDAQ's proposal does not indicate how or whether pre-trade controls
would be applied to Child Orders generated by the Application.\20\ The
application of appropriate risk controls under Rule 15c3-5 is
critically important to maintaining a robust market infrastructure
supporting the protection of investors, investor confidence, and fair,
orderly, and efficient markets for all participants.
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\19\ 17 CFR 240.15c3-5. Rule 15c3-5 is designed to ensure that
broker-dealers appropriately control the risks associated with
market access, so as not to jeopardize their own financial
condition, that of other market participants, the integrity of
trading on the securities markets, or the stability of the financial
system. See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69792 at 69794 (November 15, 2010).
\20\ See Notice, 77 FR at 29436.
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Another concern stems from the requirements in Sections 6(b)(5) and
6(b)(8) of the Act that exchange rules not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers, or to
impose an unnecessary burden on competition. NASDAQ's Benchmark Order
functionality would compete with the algorithms that member firms and
other market participants currently use to achieve VWAP, TWAP or POV
performance. The Commission is concerned whether NASDAQ's proposal
[[Page 50193]]
would enable Benchmark Orders and Child Orders generated by the
Application to receive unfair or unreasonable preferential treatment by
NASDAQ (such as through more effective access to the matching engine)
as compared to orders generated by market participants that may choose
to use a competing algorithm.
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
issues identified above, as well as any others they may have identified
with the Exchange's proposal. In particular, the Commission invites the
written views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8) under the Act, or any
other provision of the Act or rule or 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.\21\
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\21\ 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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The Commission is asking that commenters address the merit of
NASDAQ's statements in support of the proposal, in addition to any
other comments they may wish to submit about the proposed rule change.
Specifically, the Commission is requesting comment on the following:
What are commenters' views as to whether NASDAQ has
adequately addressed the potential risks to the market related to the
handling of Child Orders by NASDAQ's Application? How could such risks
be addressed and mitigated by NASDAQ?
What are commenters' views with regard to whether NASDAQ's
proposal to offer trading algorithms that would compete with other
market participants would impose an undue burden on competition or
result in unfair discrimination? In this regard, has NASDAQ provided
adequate assurances and information regarding whether or not it would
offer preferential treatment to its service as compared to similar
competing services offered by other market participants? For example,
what are commenters' views regarding whether NASDAQ's proposal could
allow for more effective access to the matching engine that could
confer advantages related to timing, priority, or otherwise?
Interested persons are invited to submit written data, views and
arguments regarding whether the proposal should be approved or
disapproved by October 4, 2012. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 19, 2012. 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 [email protected]. Please include
File Number SR-NASDAQ-2012-059 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-059. 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 Web site (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 Web site 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 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal office of NASDAQ. All comments received will
be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2012-059 and should be submitted
on or before October 4, 2012. Rebuttal comments should be submitted by
October 19, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(57).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20318 Filed 8-17-12; 8:45 am]
BILLING CODE 8011-01-P