[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Notices]
[Pages 18589-18591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7836]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64143; File No. SR-NASDAQ-2011-037]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change to Modify Chapter VI, Section 
8 of the Exchange's Rules

March 29, 2011.
    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 March 15, 2011, The NASDAQ Stock Market LLC (``NASDAQ''), 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 NASDAQ. 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

    NASDAQ proposes to modify Chapter VI, Section 8 of the Exchange's 
rules, dealing with the Nasdaq Opening Cross. Additionally, NASDAQ is 
proposing to establish a Halt Cross that is nearly identical to the 
modified Opening Cross on NOM. The Exchange proposes to implement these 
changes on or about May 31, 2011.
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at NASDAQ's principal office, 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, NASDAQ 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. NASDAQ 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 modify Chapter VI, Section 8 of the rules 
governing NOM, and in particular governing the opening of trading at 
the start of the trading day and at the resumption of trading following 
a halt. Since NOM was launched on March 31, 2008 Nasdaq has monitored 
the operation of the market to identify instances where market 
efficiency can be enhanced.\3\ NASDAQ believes that the opening of the 
market, while currently quite effective, can be further enhanced, and 
that a Halt Cross would create a more orderly opening following a 
trading halt.
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    \3\ See Securities Exchange Act Release No. 60905 (Oct. 30, 
2009), 74 FR 57544 (Nov. 6, 2009)) (SR-NASDAQ-2009-033); Securities 
Exchange Act Release No. 57822 (May 15, 2008), 73 FR 29800 (May 22, 
2008)) (SR-NASDAQ-2008-045); Securities Exchange Act Release No. 
57977 (June 17, 2008), 73 FR 35429 (June 23, 2008) (SR-NASDAQ-2008-
052).
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    First, NOM currently employs a series of tie-breakers that resolve 
instances where multiple prices satisfy the conditions for executing 
the cross. These tie-breakers govern the calculation of the Current 
Reference Price that is disseminated to market participants prior to 
the execution of a cross. The tie-breakers also govern the calculation 
of the actual cross price. The tiebreakers are criteria that operate in 
a hierarchy. If one and only one price satisfies the first criterion, 
the system has no need to move to the second. Conversely, if multiple 
prices satisfy the first criterion, the algorithm turns to the second 
criteria and if multiple prices satisfy the second criterion, the 
algorithm then turns to the third criterion.
    NASDAQ is proposing to eliminate what currently serves as the 
second tie-breaker that NOM employs to establish the Current Reference 
Price as set forth in Chapter VI, Section 8(a)(2(A)(ii) [sic] and the 
Cross price as set forth in subsection (b)(2)(B) of that Rule. This 
tie-breaker resolves price disputes based on minimizing order 
imbalances. In other words, under the current system, when more than 
one price satisfies equally the first condition for the Opening Cross, 
the system will choose that price which minimizes the order imbalance 
remaining if the cross were to be executed.
    NASDAQ has determined to eliminate this tie-breaker because it has 
not proven useful in augmenting price discovery prior to the cross or 
in

[[Page 18590]]

operating an effective opening cross. NASDAQ initially adopted the 
imbalance-based tie-breaker based upon its successful use in the 
equities opening cross. The imbalance-based tie-breaker has not 
performed well in the options cross during NASDAQ's experience. First, 
imbalances occur less often in the options market. Additionally, in 
NASDAQ's experience, such imbalances that do exist generally are much 
smaller in size than in the equities market. As a result, the size of 
an imbalance in an options cross rarely provides a meaningful basis for 
distinguishing between multiple prices at which a cross could occur. 
NASDAQ believes that elimination of this tie breaker will not hinder 
price discovery and will allow NASDAQ to focus the cross on the most 
relevant criteria.
    NASDAQ is also proposing to modify the ``mid-point'' tie-breaker 
for the price dissemination and cross calculation which are set forth 
in modified subsections 8(a)(2(A)(iii) [sic] and the Cross price as set 
forth in subsection (b)(2)(C). Rather than choosing the midpoint of the 
NBBO, as happens today, the exchange will choose a price that more 
accurately represents the supply and demand in the market at the time 
of reference price dissemination and/or auction execution. A minimum 
threshold price, based on the higher of the last crossed NOM offer or 
the NBB, will be chosen and a maximum threshold price, based on the 
lower of the last crossed NOM bid or the NBO. The midpoint (in $0.01 
increments) of the minimum threshold price and maximum threshold price 
will be the price if this tiebreaker is reached.
    NASDAQ poses the following illustrations, each based on the 
assumption that other markets are open and NASDAQ is not:

Example 1:
NBBO: $1.80 x $1.90
Pre Open NOM Book:

------------------------------------------------------------------------
                                            Buy        Sell       Sell
             Buy  contracts                prices     prices   contracts
------------------------------------------------------------------------
20.....................................      $2.00      $1.82         10
                                         .........       1.86         10
------------------------------------------------------------------------

Opening Auction/Reference Price: $1.88--The midpoint of $1.86 and $1.90
    --The last crossed NOM offer of $1.86 is used as the minimum price 
threshold because it is higher than the NBB of $1.80
    --The NBO of $1.90 is used as the maximum price threshold because 
it is lower than the last crossed NOM bid of $2.00

Example 2:
NBBO: $1.80 x $1.90
Pre Open NOM Book:

------------------------------------------------------------------------
                                            Buy        Sell       Sell
             Buy  contracts                prices     prices   contracts
------------------------------------------------------------------------
10.....................................       $MKT       $MKT         10
------------------------------------------------------------------------

Opening Auction Price: $1.85--The midpoint of $1.80 and $1.90
    --For the purpose of this tie-breaker, a price of $MKT is 
essentially infinity for buy orders and zero for sell orders
    --The NBB of $1.80 is used as the minimum price threshold because 
it is higher than the last crossed NOM offer at $MKT
    --The NBO of $1.90 is used as the maximum price threshold because 
it is lower than the lass [sic] crossed NOM bid at $MKT

Example 3:
NBBO: $1.80 x $1.90
Pre Open NOM Book:

------------------------------------------------------------------------
                                            Buy        Sell       Sell
             Buy  contracts                prices     prices   contracts
------------------------------------------------------------------------
10.....................................      $1.84      $1.75         10
------------------------------------------------------------------------

Opening Auction Price: $1.82--The midpoint of $1.80 and $1.84
    --The NBB of $1.80 is used as the minimum price threshold because 
it is higher than the last crossed NOM offer of $1.75
    --The last crossed NOM bid of $1.84 is used as the maximum 
threshold because it is lower than the NBB of $1.90

NASDAQ believes that this formulation will improve price discovery and 
execution quality.
    Additionally, NASDAQ is proposing to modify subsection 
(a)(2)(E)(iii) which governs when an indicative message is disseminated 
with a price of ``market.'' First, such message will be disseminated 
when there is trading interest with a market price that is not offset, 
not when there is marketable interest. Second, whether NOM disseminates 
an indicative price of ``market'' will not depend upon the available 
interest being priced lower or higher than the near or far clearing 
prices. NASDAQ believes that this formulation of ``market'' will reduce 
potential confusion about NASDAQ's dissemination practices.
    NASDAQ is also proposing to modify subsection (b)(1) of Section 8 
to provide increased calibration of the time at which imbalance and 
indicative price data will begin to be disseminated. Generally, NASDAQ 
has had positive experience and feedback in beginning indicative data 
dissemination at 9:25 a.m. EST. Occasionally, however, NASDAQ has 
received participant feedback that an options class or classes would 
benefit from a different dissemination period due to the trading 
characteristics of that option. Accordingly, NASDAQ is proposing to 
calibrate the start time for data dissemination between 9:20 a.m. and 
9:28 a.m. The initial default time for dissemination to being will 
remain at 9:25. NASDAQ believes that this calibration could benefit 
investors and poses little risk. When NASDAQ does change the start time 
for data dissemination, which will be rare, the new time of imbalance 
dissemination commencement would be published in advance and with equal 
access on the NASDAQ Trader Web site.
    Moreover, NASDAQ is proposing to modify subsection (b)(5) to 
clarify when an Order Imbalance Indicator will be disseminated just 
prior to the opening cross. Currently, any time an imbalance remains 
just prior to the opening cross, NASDAQ disseminates a final Order 
Imbalance Indicator. Under the proposed modified rule, NASDAQ will 
disseminate this final Order Imbalance Indicator only when the 
imbalance contains routable trading interest that is marketable against 
the NBBO. The exchange believes that non-routable interest is best 
served by being posted on the exchange after execution of the opening 
cross.\4\ Once the cross is executed and the order is posted, that 
trading interest will be disseminated as part of the exchange best bid 
or offer via the consolidated data feed. This broad dissemination will 
better advertise the trading interest and thereby increase the 
likelihood of an execution. Additionally, the exchange proposes to 
clarify that after the opening cross is executed, all orders in the 
imbalance will be cancelled, routed, or posted in accordance with the 
entering party's instructions.
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    \4\ NASDAQ states that the goal of NOM's open is to attract as 
much liquidity as possible to interact with any orders that are 
marketable at the time of the open. NASDAQ believes that the change 
to post non-routable orders (at the NBBO) rather than disseminating 
additional imbalance messages provides more advertisement for the 
order because it is broadcast over the consolidated quote feed 
rather than just NASDAQ's proprietary market data feeds. For 
routable orders NOM is continuing the current process of advertising 
the order(s) via an imbalance message on NASDAQ's proprietary market 
data feeds rather than opening immediately and routing the order 
away. By doing this, NASDAQ's goal is to get the order a price that 
is equal to or better than the away quoted price. See email from 
Jeffrey S. Davis, Vice President and Deputy General Counsel, NASDAQ 
OMX Group, Inc., to Carl E. Tugberk, Special Counsel, Division of 
Trading and Markets, Commission, dated March 29, 2011.

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[[Page 18591]]

    Finally, NASDAQ is proposing to re-establish an Opening Cross to be 
executed upon the termination of a trading halt.\5\ Having operated NOM 
for almost two years, NASDAQ has determined in its experience that an 
auction will provide a more orderly opening of the market after a halt. 
This is particularly true because NOM has attracted significantly 
higher levels of liquidity, an important ingredient for a successful 
cross. Accordingly, NASDAQ is proposing to modify Chapter V, Section 4 
(Resumption of Trading After a Halt) and various subsections of Chapter 
VI, Section 8. The Opening Cross will operate in the same manner 
following a trading halt as it operates at the start of the trading 
day, including dissemination of the Order Imbalance Indicator, matching 
algorithm, and posing or routing of interest that remains unexecuted 
following execution of the opening cross. The Opening Cross for halted 
options will differ only in the time at which it occurs and the fact 
that that time is determined pursuant to Chapter V, Section 4.
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    \5\ When Nasdaq first proposed its options trading rules, it 
planned to resume trading by operating a ``Halt Cross,'' which it 
originally described in Chapter VI, Section 8. Nasdaq later amended 
the proposed rules to remove the Halt Cross. See Securities Exchange 
Act Release Nos. 57478 (March 12, 2008), 73 FR 14521 (March 18, 
2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approval order 
regarding NOM Rules including Chapters III and XIV).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \7\ 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. 
Nasdaq believes that the proposal is consistent with this standard 
because the proposed rule change is designed to improve execution 
quality at the critical opening of the market both at the start of the 
trading day and following a trading halt.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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 (i) as the Commission may 
designate up to 90 days of such date 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 such 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, as amended, 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 e-mail to [email protected]. Please include 
File Number SR-NASDAQ-2011-037 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-2011-037. This 
file number should be included on the subject line if e-mail 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 on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing also will be available for inspection and copying at the 
principal offices 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-2011-037, and should be submitted on or before 
April 25, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-7836 Filed 4-1-11; 8:45 am]
BILLING CODE 8011-01-P