[Federal Register Volume 80, Number 16 (Monday, January 26, 2015)]
[Notices]
[Pages 4008-4011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-01249]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74096; File No. SR-NASDAQ-2014-116]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change Relating to the NASDAQ Opening and
Halt Cross
January 20, 2015.
I. Introduction
On November 21, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or
the ``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 relating to its process for opening trading on
Nasdaq Options Market, LLC (``NOM'') at the beginning of the trading
day and following a trading halt. The proposed rule change was
published for comment in the Federal Register on December 10, 2014.\3\
The Commission received no comments on the proposal. This order
approves 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. 73739 (November 12,
2014), 79 FR 73382 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to modify its process for opening option
trading on NOM at the beginning of the trading day and following a
trading halt. The Exchange proposes to accomplish this by revising
definitional terms set forth in Chapter VI, Sections 1 and 8(a) of its
rules, and by revising the description of the processing of the Nasdaq
Opening Cross \4\ set forth in Chapter VI, Section 8(b) of its rules.
The Exchange also proposes to revise the language set forth in Chapter
VI, Section 8(c) describing what occurs in the absence of an opening
cross.\5\
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\4\ The term ``Nasdaq Opening Cross'' is defined in Chapter VI,
Section 8(a)(3) of the Exchange's rules. As is discussed infra, this
definition is among those that the Exchange has proposed to revise.
\5\ Unless otherwise noted, all citations herein to Sections of
the Exchange's rules are citations to Sections of Chapter VI of its
rules.
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Definitions--Sections 1 and 8(a)
The Exchange proposes to add an ``On the Open Order'' or ``OPG'' as
a new order type and time-in-force condition defined in Section 1. As
proposed, any order designated as such would be executable only during
the Nasdaq Opening Cross, with any portion not so executed cancelled
back to the entering participant.\6\
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\6\ See proposed Sections 1(e)(7) and 1(g)(1).
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In addition, the Exchange proposes to make the following
definitional changes to Section 8(a):
``Order Imbalance Indicator'' is currently defined as a
message disseminated by electronic means containing information about
``Eligible Interest'' \7\ and the price in penny increments at which
such interest would execute at the time of dissemination.\8\ The
``Current Reference Price'' is one piece of information disseminated as
part of the Order Imbalance Indicator and, as currently defined, is
determined based on three price parameters.\9\ The Exchange proposes to
delete these price parameters and to simplify the definition of
``Current Reference Price'' to be: An indication of what the opening
cross would be at a particular point in time.\10\ Additionally, the
indicative prices at which the Nasdaq Opening
[[Page 4009]]
Cross would occur, which are also currently disseminated as part of the
Order Imbalance Indicator,\11\ would be eliminated from such
dissemination as part of the proposal.\12\
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\7\ The term ``Eligible Interest'' is defined in Section 8(a)(4)
and, as discussed below, is a term that the Exchange proposes to
modify.
\8\ See Section 8(a)(2). The Exchange proposes to provide itself
with the ability to disseminate the Order Imbalance Indicator more
frequently than the five second intervals currently required. See
proposed Section 8(b)(3). The Exchange also proposes to specify that
the dissemination interval, in addition to the start of
dissemination, would be posted on its Web site. Id.
\9\ See Section 8(a)(2)(A).
\10\ See proposed Section 8(a)(2)(A). The Exchange states that
the revised definition of Current Reference Price would be
substantively similar to the current definition, but with the
opening cross price determined pursuant to Section 8(b). See Notice,
79 FR at 73383.
\11\ See Section 8(a)(2)(E).
\12\ See proposed Section 8(a)(2), from which current Section
8(a)(2)(E) would be deleted.
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The Exchange proposes to revise the term ``Nasdaq Opening
Cross'' to mean the process for opening or resuming trading pursuant to
Section 8, which includes the process for determining the price at
which Eligible Interest shall be executed at the opening of trading for
the day or the opening of trading for a halted option, and the process
for executing such Eligible Interest.\13\
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\13\ See proposed Section 8(a)(3).
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The Exchange would revise the term ``Eligible Interest''
to mean any quotation or any order that may be entered into the system
and designated with a time-in-force of IOC (immediate-or-cancel), DAY
(day order), GTC (good-till-cancelled), and OPG (On the Open
Order).\14\ The Exchange would also revise the definition of this term
to specify that orders received via FIX protocol prior to the Nasdaq
Opening Cross designated with a time-in-force of IOC would be rejected
and shall not be considered Eligible Interest, and orders received via
OTTO and SQF protocols prior to the Nasdaq Opening Cross designated
with a time-in-force of IOC would remain in force through the opening
but be cancelled immediately after the opening.\15\ The Exchange notes
that FIX protocol users generally prefer a cancellation if an order is
not executed immediately so that they can have an opportunity to access
other markets, while OTTO and SQF protocol users are liquidity
providers who prefer that their orders live throughout the entire
opening process until it is clear that their liquidity was not utilized
in the opening.\16\
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\14\ See proposed Section 8(a)(4).
\15\ Id.
\16\ See Notice, 79 FR at 73383.
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The Exchange also proposes to add new terms ``Valid Width
National Best Bid or Offer'' (or ``Valid Width NBBO'') and ``Away Best
Bid or Offer'' (or ``ABBO'') to Section 8(a). Specifically, in new
Section 8(a)(6), the Exchange proposes to define ``Valid Width NBBO''
as the combination of all away market quotes and any combination of
NOM-registered Market Maker (``Market Maker'') orders and quotes
received over the OTTO or SQF protocols within a specified bid/ask
differential as established and published by the Exchange. The Valid
Width NBBO would be configurable by underlying, and a table with valid
width differentials would be posted by Nasdaq on its Web site.\17\ Away
markets that are crossed (i.e., an away market is internally crossed or
crosses another away market) would void all Valid Width NBBO
calculations.\18\ If any Market Maker orders or quotes on NOM are
crossed internally, then all such orders and quotes would be excluded
from the Valid Width NBBO calculation.\19\ In addition, in new Section
8(a)(7), the Exchange proposes to define ``ABBO'' as the displayed
National Best Bid or Offer not including the Exchange's Best Bid or
Offer. The Exchange states that it is proposing to add these new terms
in order to ensure that all away market quotes and any combination of
Market Maker orders and quotes, whether they include the Exchange's
Best Bid or Offer or not, are represented in the opening cross.\20\
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\17\ See proposed Section 8(a)(6).
\18\ Id.; see also Notice, 79 FR at 73384.
\19\ See proposed Section 8(a)(6).
\20\ See Notice, 79 FR at 73384. The Exchange also notes that,
with respect to the Valid Width NBBO, the orders and quotes on the
Exchange would be received over the OTTO or SQF protocols. Id.
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Processing of Nasdaq Opening Cross--Section 8(b)
The Exchange proposes various revisions to the Nasdaq Opening Cross
process set forth in Section 8(b). As an initial matter, the Exchange
proposes to edit the introductory paragraph of Section 8(b) by:
Deleting the phrase ``there is no Imbalance'' so that the rule applies
more generally; deleting the phrase ``on a class-by-class basis'' in
order to clarify that the Exchange will use a regular market hours
quote or trade (as determined by the Exchange) for all classes on the
Exchange for the Opening Cross without distinguishing among different
classes; and adding the phrase ``the Opening Process shall occur'' in
order to clarify that an Opening Cross shall occur after a trading halt
when trading resumes pursuant to Chapter V, Section 4.\21\
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\21\ See proposed Section 8(b); see also Notice, 79 FR at 73384.
Chapter V, Section 4 states that trading in an option that has been
the subject of a halt under Section 3 of Chapter V shall be resumed
upon the determination by Nasdaq Regulation that the conditions
which led to the halt are no longer present or that the interests of
a fair and orderly market are best served by a resumption of
trading. According to the Exchange, trading shall resume according
to the process set forth in proposed Section 8(b). See Notice, 79 FR
at 73383.
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Following the introductory paragraph, the Exchange proposes to set
forth the criteria that must be present for NOM to open trading at the
beginning of the day or after a halt, provided the ABBO is not
crossed.\22\ Specifically, the rule would state that, if a trade is
possible on NOM, there must be a Valid Width NBBO before trading will
open; \23\ and if no trade is possible on NOM, then trading would open
upon the occurrence of any one of the following three criteria: (A) A
Valid Width NBBO is present, (B) a certain number of other options
exchanges (as determined by the Exchange) have disseminated a firm
quote on OPRA, or (C) a certain period of time (as determined by the
Exchange) has elapsed.\24\
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\22\ See proposed Section 8(b).
\23\ See proposed Section 8(b)(1).
\24\ See proposed Section 8(b)(2). In the case of a crossed
ABBO, the Exchange notes that the conditions set forth in proposed
Sections 8(b)(1) and (b)(2) would become operative when the ABBO
becomes uncrossed. See Notice, 79 FR at 73384 n.18. Additionally,
the Exchange notes that, due to its proposed addition of new
Sections 8(b)(1) and (b)(2), it has proposed to renumber current
Sections 8(b)(1) through 8(b)(5) to 8(b)(3) through 8(b)(7),
respectively. See Notice, 79 FR at 73386.
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In addition, the Exchange proposes to add language in proposed
Section 8(b)(4)(A)-(C) to specify how the Opening Cross price would be
determined when a trade is possible on NOM and a Valid Width NBBO is
present. Proposed Section 8(b)(4)(A) would state that the Nasdaq
Opening Cross shall occur at the price that maximizes the number of
contracts of Eligible Interest in NOM to be executed at or within the
ABBO and within a defined range, as established and published by the
Exchange, of the Valid Width NBBO.\25\ Proposed Section 8(b)(4)(B)
would state that if more than one price exists under subparagraph (A)
and there are no contracts that would remain unexecuted in the cross,
the Nasdaq Opening Cross shall occur at the midpoint price, rounded to
the penny closest to the price of the last execution in that series
(and in the absence of a previous execution price, the price will round
up, if necessary),\26\ of (1) the National Best Bid or the last offer
on NOM against which contracts would be traded, whichever is higher;
and (2) the National Best Offer or the last bid on NOM against which
contracts would be traded, whichever is lower.\27\ Proposed Section
8(b)(4)(C) would state if more than one price exists under
[[Page 4010]]
subparagraph (A) and contracts would remain unexecuted in the cross,
then the opening price would be the highest (lowest) price in the case
of a buy (sell) imbalance at which the maximum number of contracts can
trade which is equal to or within a defined range, as established and
published by the Exchange,\28\ of the Valid Width NBBO on the contra
side of the imbalance that would not trade through the ABBO.\29\
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\25\ See proposed Section 8(b)(4)(A).
\26\ The Exchange notes that rounding would be applied, if
needed, in the following manner: If the previous closing price is
less than the midpoint, then the opening price rounds down; and if
the previous closing price is greater than the midpoint, or if there
is no closing price, then the opening price rounds up. For example,
if there is a midpoint of 1.045, the opening price would be rounded
to 1.04 if the previous closing price was 1.00, and would be rounded
to 1.05 if the previous closing price was 1.10. See Notice, 79 FR at
73385 n.22.
\27\ See proposed Section 8(b)(4)(B).
\28\ The Exchange notes that, pursuant to Section 10(7), the
system will also calculate a defined range to limit the range of
prices at which an order would be allowed to execute. See Notice, 79
FR at 73385 n.23.
\29\ See proposed Section 8(b)(4)(C).
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Further, the Exchange proposes to add subsections to proposed
Section 8(b)(4)(C) in order to specify the price at which unexecuted
contracts would be posted on the book following the Opening Cross and
the subsequent handling of the residual unexecuted contracts.\30\ These
subsections would provide as follows: (i) If unexecuted contracts
remain with a limit price that is equal to the opening price, then the
remaining unexecuted contracts would be posted at the opening price,
displayed one minimum price variation (MPV) away if displaying at the
opening price would lock or cross the ABBO, with the contra-side NOM
BBO reflected as firm; (ii) if unexecuted contracts remain with a limit
price that is through the opening price, and there is a contra side
ABBO at the opening price, then the remaining unexecuted contracts
would be posted at the opening price, displayed one minimum price
variation (MPV) away from the ABBO, with the contra side NOM BBO
reflected as firm, and order handling of any remaining interest would
be done in accordance with the routing and time-in-force instructions
of such interest and would follow the Acceptable Trade Range mechanism
set forth in Section 10; (iii) if unexecuted contracts remain with a
limit price that is through the opening price, and there is no contra
side ABBO at the opening price, then the remaining contracts would be
posted at the opening price, with the contra-side NOM BBO reflected as
non-firm; and (iv) order handling of any residual unexecuted contracts
would be done in accordance with Section 10(7), with the opening price
representing the reference price.\31\
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\30\ See proposed Section 8(b)(4)(C)(i)-(iv).
\31\ Id.
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This proposed handling of unexecuted contracts set forth in
subsections (i)-(iv) of proposed Section 8(b)(4)(C) is intended to
ensure that residual unexecuted contracts from the Opening Cross,
regardless of their limit prices, are posted on the book at the opening
price before subsequently being routed pursuant to Section 11 or walked
to the next potential execution price(s) under the Acceptable Trade
Range set forth in Section 10(7) (with the opening price representing
the ``reference price'' of that rule).\32\ Moreover, the ``firm''
versus ``non-firm'' tagging of contra-side interest when residual
Opening Cross interest is posted follows the construct currently in
place on the Exchange when aggressive interest is received and triggers
an Acceptable Trade Range (ATR) process.\33\ Contra-side NOM BBO
interest is reflected as non-firm when the Exchange has interest with a
limit price (or market order) that is more aggressive than the Opening
Cross price in order to ensure that aggressively priced residual
interest maintains priority should other aggressively priced interest
be entered before the residual interest is permitted to access the next
allowable range of prices.\34\
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\32\ See Notice, 79 FR at 73386.
\33\ Id.
\34\ Id.
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The Exchange is also proposing to add new text to proposed Section
8(b)(5) to indicate that if the Nasdaq Opening Cross price is selected
and fewer than all contracts of Eligible Interest that are available in
NOM would be executed, all Eligible Interest shall be executed at the
Nasdaq Opening Cross price in accordance with the execution algorithm
assigned to the associated underlying option.\35\
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\35\ See proposed Section 8(b)(5).
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Absence of Opening Cross--Section 8(c)
Lastly, the Exchange proposes to add a new Section 8(c) providing
for the return of orders in un-opened symbols in the absence of an
Opening Cross. Proposed new Section 8(c) would be substituted for
current Section 8(c) and would provide that if an Opening Cross in a
symbol is not initiated before the conclusion of the Opening Order
Cancel Timer, a firm may elect to have orders returned by providing
written notification to the Exchange.\36\ These orders include all non
GTC orders received over the FIX protocol.\37\ The Opening Order Cancel
Timer represents a period of time since the underlying market has
opened, and shall be established and disseminated by Nasdaq on its Web
site.\38\
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\36\ See proposed Section 8(c).
\37\ Id.
\38\ Id.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\39\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\40\ which
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.
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\39\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\40\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposal is consistent with Section
6(b)(5) of the Act because it will enhance and clarify the opening
cross process, minimize or negate unnecessary complexity, and encourage
liquidity when trading opens. The Exchange notes that it proposes to
set forth in Section 8(b) clear language describing under what
circumstances an opening cross will occur, and how the opening cross
will occur if more than one possible cross price exists. In addition,
according to the Exchange, the proposed rule change will enhance the
price discovery mechanism in the opening process by including not only
Market Maker orders and quotes but also away market interest as
represented by quotes. The Exchange believes this change will make the
transition from the opening cross period to regular market trading more
efficient and thus promote just and equitable principles of trade and
serve to protect investors and the public interest. The Exchange also
believes that the proposal will significantly improve the quality of
execution of NOM's opening, which should attract new order flow. In the
Exchange's view, the proposed rule changes should prove helpful to
market participants, particularly those that are involved in adding
liquidity during the opening cross.
The Commission believes that the proposal is reasonably 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 to protect investors and the public interest by
adding clarity to the Exchange's rules governing NOM's opening cross
process. This enhanced transparency should help to reduce the
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potential for investor confusion as to when an opening cross occurs,
how the price for the opening cross is determined, and how orders
involved in the opening cross are handled. The Commission also believes
that the proposed opening cross process is reasonably designed to open
trading in a fair and orderly manner, which is consistent with the
protection of investors and the public interest. Additionally, to
extent the proposal results in additional liquidity during NOM's
opening at the beginning of the trading day or following a trading
halt, and a more orderly transition to regular trading, it should
further promote the goals of Section 6(b)(5) of the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\41\ that the proposed rule change (SR-NASDAQ-2014-116) be, and it
hereby is, approved.
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\41\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-01249 Filed 1-23-15; 8:45 am]
BILLING CODE 8011-01-P