[Federal Register Volume 81, Number 222 (Thursday, November 17, 2016)]
[Notices]
[Pages 81219-81221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27592]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79282; File No. SR-NASDAQ-2016-156]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Rule 4702 and Rule 4703 To Add a ``Trade Now'' Instruction to
Certain Order Types
November 10, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 8, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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 the
Substance of the Proposed Rule Change
The Exchange proposes to amend Rule 4702 (Order Types) and Rule
4703 (Order Attributes) to add a ``Trade Now'' instruction to certain
order types.
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaq.cchwallstreet.com/, 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
Nasdaq proposes to amend Rules [sic] 4702 (Order Types) and Rule
4703 (Order Attributes) to add a ``Trade Now'' instruction to certain
order types. Nasdaq will offer this functionality through its OUCH,
RASH, FLITE, and FIX protocols. This instruction will provide resting
orders with a greater ability to receive an execution when that resting
order is locked, e.g., the price of a resting non-display buy order
equals the price of a resting displayed sell order on the Nasdaq book.
The Trade Now instruction will allow participants to enter an
instruction to have a locked resting buy (sell) order execute against
the locking sell (buy) order. Depending on the protocol used by the
participant to access the Nasdaq system, the participant may either
specify that the order execute against locking interest automatically,
or the participant may be required to send a Trade Now instruction to
the Exchange once the order has become locked. As discussed in greater
detail below, Nasdaq is offering the Trade Now instruction for all
orders that may be sent to the continuous Nasdaq book, and will not
offer the instruction for orders that do not execute on the continuous
book.
When a Trade Now instruction is applied to a resting buy (sell)
order, the order will execute against the available size of the locking
sell (buy) order at the locked price. The following example illustrates
this scenario:
Participant A enters a Non-Display buy order for 200
shares at $10, and specifies the Trade Now instruction;
Participant B enters a Post Only sell order for 100 shares
at $10; \3\
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\3\ The Exchange recently submitted a proposal to amend Nasdaq
Rules 4702 and 4703 to change the way in which Post Only Orders
interact with resting Non-Display orders and preventing the
execution of midpoint pegged orders during a crossed market. See
Securities Exchange Act Release No. 78908 (September 22, 2016), 81
FR 66702 (September 28, 2016) (SR-NASDAQ-2016-111).
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The Post Only order is posted at $10 and locks the Non-
Display order;
The buy order will execute for 100 shares at $10 as the
remover of liquidity.
If a buy (sell) order with the Trade Now instruction is only
partially executed, the unexecuted portion of that order remains on the
Nasdaq book and maintains its priority. When a Trade Now instruction is
entered through the OUCH or FLITE protocol for a resting buy (sell)
order and there is no locking
[[Page 81220]]
order on the opposite side of the market, the Trade Now instruction
will be ignored and the buy (sell) order will remain on the Nasdaq
book, retaining its priority.
As noted above, Nasdaq is proposing to offer the Trade Now
instruction for all orders that may be sent to the continuous Nasdaq
book (as opposed to the opening and closing book), and will not offer
the instruction for orders that do not execute on the continuous book.
Accordingly, the Trade Now instruction shall not be available for
Supplemental Orders (Rule 4702(b)(6)), Market On Open Orders (Rule
4702(b)(8)), Limit On Open Orders (Rule 4702(b)(9)), Opening Imbalance
Only Orders (Rule 4702(b)(10)), Market On Close Orders (Rule
4702(b)(11)), Limit on Close Orders (Rule 4702(b)(12)), and Imbalance
Only Orders (Rule 4702(b)(13)). These order types are subject to other
Nasdaq rules regarding the display and execution of those orders, and
the use of the Trade Now instruction would be inconsistent with those
other Nasdaq rules.\4\ Accordingly, Nasdaq is not offering the Trade
Now instruction for those order types.
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\4\ For example, a Supplemental Order is an order type with a
Non-Display Order attribute that is held on the Nasdaq Book in order
to provide liquidity at the NBBO through a special execution process
described in Rule 4757(a)(1)(D). Rule 4757(a)(1)(D) provides that a
Supplemental Order will be matched against an order only at the
National Best Bid or Offer, and only if the size of the order is
less than or equal to the aggregate size of Supplemental Order
interest available at the price of the order. In addition, a
Supplemental Order will not execute if the NBBO is locked or
crossed. See Rule 4757(a)(1)(D). To the extent that a Supplemental
Order will only be matched at the National Best Bid or Offer, and
the Trade-Now instruction allows a locked resting order to execute
at a price that is potentially better than the NBBO, the function of
the Trade-Now instruction is inconsistent with the function of the
Supplemental Order. Similarly, the purpose of the various Cross
mechanisms is to establish a price that maximizes the number of
applicable quotes and orders that may be executed. See, e.g., Rule
4752(d)(2). Allowing an order to automatically execute against
locking interest without regard to the price of other same-side
interest is inconsistent with a process that establishes a price at
which the maximum number of shares may be paired.
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Depending on the interface being used by the participant, the Trade
Now attribute may either allow the order to execute against locking
interest automatically (``Reactive Trade Now''), or the participant may
be required to send a Trade Now instruction to the Exchange once the
order has become locked (``Non-Reactive Trade Now''). All orders that
are entered through the RASH and FIX protocols with a Trade Now order
attribute will be Reactive Trade Now, and those orders shall execute
against locking interest automatically.
The Reactive Trade Now instruction will be available on an order-
by-order basis, and will also be available as an optional port level
setting. If the Reactive Trade Now setting is enabled on a specific
port, all orders entered via the specific port will, by default, be
designated with the Reactive Trade Now instruction. If the Reactive
Trade Now setting is enabled on a specific port, participants will have
the ability to designate on an order-by-order basis that a particular
order entered via the specific port will not be designated with the
Reactive Trade Now instruction, thereby overriding the port level
setting for the order. If the Reactive Trade Now instruction is
specified for an order for which the Trade Now instruction does not
apply, e.g., a Supplemental Order or a Market On Open Order, the system
will not invoke the Trade Now instruction for that order.
In contrast, orders entered through the OUCH and FLITE protocols
will use the Non-Reactive Trade Now functionality, and participants
must send the Trade Now instruction after the order becomes locked. If
a participant enters a Non-Reactive Trade Now instruction when there is
no locking interest, the instruction will be ignored by the system and
the order will remain on the Nasdaq Book with the same priority.
The Non-Reactive Trade Now instruction will be available to
participants on order-by-order basis. If the Non-Reactive Trade Now
instruction is entered for an order for which the Trade Now instruction
does not apply, the system will not invoke the Trade Now instruction
for that order.
Nasdaq is offering two different variations of the Trade Now
instruction to reflect the differences in behavior among participants
who use the different Nasdaq protocols. For example, Nasdaq typically
assumes a more active role in managing the order flow submitted by
users of the RASH and FIX protocols. Allowing these participants to use
the Reactive Trade Now instruction at the time of order entry will
allow for the automatic execution of orders, and reflects the order
flow management practices of these participants. In contrast, users of
the OUCH and FLITE protocols generally assume a more active role in
managing their order flow. Offering the Non-Reactive Trade Now
instruction for these protocols, and its requirement that the
instruction must be sent after the order becomes locked, reflects the
order flow management practices of these participants.
Nasdaq notes that a similar functionality currently exists on NYSE
Arca, Inc. (``NYSE Arca''), which NYSE Arca refers to as a ``Non-
Display Remove Modifier.'' As set forth in NYSE Arca Rule 7.31, a Limit
Non-Displayed Order may be designated with a Non-Display Remove
Modifier. If so designated, a Limit Non-Displayed Order to buy (sell)
will trade as the liquidity-taking order with an incoming Adding
Liquidity Only Order (``ALO Order'') to sell (buy) that has a working
price equal to the working price of the Limit Non-Displayed Order.\5\
NYSE Arca also provides this functionality for other orders, such as
Mid-Point Passive Liquidity Orders (``MPL Orders'') designated Day and
MPL-ALO Orders \6\ and Arca Only Orders.\7\
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\5\ See NYSE Arca Rule 7.31(d)(2)(B).
\6\ See NYSE Arca Rule 7.31(d)(3)(G).
\7\ See NYSE Arca Rule 7.31(e)(1)(C). To the extent that the
Trade-Now functionality will be made available for Price to Comply
Orders, Price to Display Orders, Non-Displayed Orders, Post-Only
Orders, Midpoint Peg Post-Only Orders, and Market Maker Peg Orders,
Nasdaq notes that the Trade-Now functionality will apply to
different order types than the NYSE Arca Non-Display Remove Modifier
functionality.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\8\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\9\ 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,
by offering participants an additional functionality that will
facilitate the execution of locked orders, thereby increasing the
efficient functioning of the Nasdaq market. The Trade Now functionality
is an optional feature that is being offered at no additional charge,
and is designed to reflect both the objectives of the Nasdaq market,
and the order flow management practices of various market participants.
For these reasons, the Trade Now functionality will only be made
available for orders that are entered in the continuous Nasdaq book,
and, depending on the protocol, will be offered as either the Reactive
Trade Now or Non-Reactive Trade Now functionality.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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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. This is an optional
functionality that is being
[[Page 81221]]
offered at no charge, and which may be used equally by similarly-
situated participants. Although the functionality of the Trade Now
instruction will differ depending upon the protocol that is being used
to access Nasdaq, Nasdaq believes that the difference in functionality
reflects the different ways in which participants enter and manage
their order flow.
As noted above, Nasdaq will offer the Trade Now functionality
through the OUCH, RASH, FLITE, and FIX protocols. Nasdaq will not offer
the Trade Now functionality through the QIX protocol.\10\ Nasdaq notes
that, although the QIX protocol can support the removing of liquidity,
QIX is designed to provide two-sided quote messages to the trading
system, unlike the OUCH, RASH, FLITE and FIX protocols, which are
designed to facilitate order submission. Nasdaq also notes that QIX is
an infrequently-used protocol,\11\ and that this protocol cannot
support the expansion of fields that adopting the Trade Now instruction
would require. Nasdaq therefore believes that its decision to offer the
Trade Now instruction through the OUCH, RASH, FLITE, and FIX protocols
will not impose any burden on competition that is not necessary or
appropriate.
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\10\ Although participants may use other protocols, such as
DROP, those protocols are not related to order entry, and so the
Trade Now functionality is not being offered for those protocols.
\11\ As of September 15, 2016, of the 5,090 customer ports for
the various Nasdaq protocols, only 124 of those ports are QIX
protocol.
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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 and Rule 19b-
4(f)(6) thereunder.\12\
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\12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the 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.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \13\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative immediately upon filing. The Exchange
states that the Trade Now functionality is complementary to its recent
proposal to change the way in which Post Only Orders interact with
resting Non-Display orders.\15\ The Exchange believes that releasing
both complementary functionalities at the same time will be easier for
market participants to manage and implement. The Exchange further
believes that the Trade Now functionality will facilitate the execution
of locked orders, thereby increasing the efficient functioning of the
Nasdaq market, and that waiver of the operative delay will allow this
functionality to be made available at an earlier date. Finally, the
Exchange notes that NYSE Arca currently utilizes a similar
functionality in the form of its Non-Display Remove Modifier. The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposed rule change operative upon filing.\16\
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\13\ 17 CFR 240.19b-4(f)(6).
\14\ 17 CFR 240.19b-4(f)(6)(iii).
\15\ See supra note 3.
\16\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 [email protected]. Please include
File Number SR-NASDAQ-2016-156 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2016-156. 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
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. 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-2016-156, and should
be submitted on or before December 8, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Brent J. Fields,
Secretary.
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\17\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-27592 Filed 11-16-16; 8:45 am]
BILLING CODE 8011-01-P