[Federal Register Volume 77, Number 153 (Wednesday, August 8, 2012)]
[Notices]
[Pages 47472-47474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-19363]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67584; File No. SR-NASDAQ-2012-066]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change, as Modified by Amendment No. 1, To
Adopt a New Market Maker Peg Order Available to Exchange Market Makers
August 2, 2012.
I. Introduction
On June 6, 2012, The NASDAQ Stock Market LLC (``Exchange'' or
``NASDAQ'') 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 adopt a new Market Maker Peg Order to provide
similar functionality as the automated functionality provided to market
makers under Rules
[[Page 47473]]
4613(a)(2)(F) and (G). The proposed rule change was published for
comment in the Federal Register on June 20, 2012.\3\ The Commission
received no comment letters regarding the proposed rule change. This
order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 67203 (Jun. 20,
2012), 77 FR 37086 (``Notice''). The Commission notes that on August
2, 2012, the Exchange submitted Amendment No. 1 to the proposed rule
change to make certain amendments that, in part, clarified the
operation of the new Market Maker Peg Order functionality if, after
entry, the Market Maker Peg Order is priced based on the
consolidated last sale and such Market Maker Peg Order is
established as the National Best Bid or National Best Offer.
---------------------------------------------------------------------------
II. Background
NASDAQ is proposing to adopt a new Market Maker Peg Order (as
defined in proposed Rule 4751(f)(15)) to provide a similar
functionality presently available to Exchange market makers under Rules
4613(a)(2)(F) and (G).\4\ NASDAQ adopted Rules 4613(a)(2)(F) and (G) as
part of an effort to address issues uncovered by the aberrant trading
that occurred on May 6, 2010.\5\ According to the Exchange, the
automated quote management functionality (``AQ'') offered by these
rules is designed to help Exchange market makers meet the enhanced
market maker obligations adopted post May 6, 2010,\6\ and avoid
execution of market maker ``stub quotes'' in instances of aberrant
trading.\7\ As part of these obligations, NASDAQ requires market makers
for each stock in which they are registered to continuously maintain a
two-sided quotation within a designated percentage of the National Best
Bid and National Best Offer,\8\ as appropriate. According to NASDAQ, AQ
presents difficulties to market makers in meeting their obligations
under Rule 15c3-5 under the Act (the ``Market Access Rule'') \9\ and
Regulation SHO.\10\ Specifically, the current AQ functionality offered
to market makers reprices and ``refreshes'' a market maker's quote when
it is executed against, without any action required by the market
maker. When a market maker's quote is refreshed by the Exchange,
however, the market maker has an obligation to ensure that the
requirements of the Market Access Rule and Regulation SHO are met. To
meet these obligations, a market maker must actively monitor the status
of its quotes and ensure that the requirements of the Market Access
Rule and Regulation SHO are being satisfied.
---------------------------------------------------------------------------
\4\ NASDAQ will continue to offer the present automated quote
management functionality provided to market makers under Rules
4613(a)(2)(F) and (G) for a period of 3 months after the
implementation of the proposed Market Maker Peg Order. The purpose
of this transition period, during which both the present automated
quote management functionality under Rules 4163(a)(2)(F) and (G) and
the Market Maker Peg Order will operate concurrently, is to afford
market makers with the opportunity to adequately test the new Market
Maker Peg Order and migrate away from the present automated quote
management functionality under Rules 4613(a)(2)(F) and (G). Prior to
the end of this three month period, NASDAQ represents that it will
submit a rule filing to retire the automated quote management
functionality under Rules 4613(a)(2)(F) and (G). See Notice, supra
note 3 at 37087.
\5\ Securities Exchange Act Release No. 63255 (November 5,
2010), 75 FR 69484 (November 12, 2010) (SR-NASDAQ-2010-115, et al.).
\6\ Id.
\7\ For each issue in which a market maker is registered, AQ
automatically creates a quotation for display to comply with market
making obligations. Compliant displayed quotations are thereafter
allowed to rest and are not further adjusted unless the relationship
between the quotation and its related national best bid or national
best offer, as appropriate, shrinks to the greater of: (a) 4
percentage points, or, (b) one-quarter the applicable percentage
necessary to trigger an individual stock trading pause as described
in Rule 4120(a)(11), or expands to within that same percentage less
0.5%, whereupon AQ will immediately re-adjust and display the market
maker's quote to the appropriate designated percentage. Quotations
originally entered by market makers are allowed to move freely
towards the national best bid or national best offer, as
appropriate, for potential execution. In the event of an execution
against a System (as defined in Rule 4751(a)) created compliant
quotation, the market maker's quote is refreshed by AQ on the
executed side of the market at the applicable designated percentage
away from the then national best bid (offer), or if no national best
bid (offer), the last reported sale. Rule 4613(F) & (G).
\8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR
242.600.
\9\ See Notice, supra note 3 at 37087.
\10\ 17 CFR 242.200 through 204.
---------------------------------------------------------------------------
Market Maker Peg Order
In an effort to simplify market maker compliance with the
requirements of the Market Access Rule and Regulation SHO, NASDAQ
proposes to adopt a new order type available only to Exchange market
makers, which offers AQ-like functionality but also allows a market
maker to comply with the requirements of the Market Access Rule and
Regulation SHO. Specifically, NASDAQ proposes to replace AQ
functionality with the Market Maker Peg Order. The Market Maker Peg
Order would be a one-sided limit order and similar to other peg orders
available to market participants in that the order is tied or
``pegged'' to a certain price,\11\ but it would not be eligible for
routing pursuant Rule 4758 and would always be displayed and
attributable (as defined in Rule 4751). The Market Maker Peg Order
would be limited to market makers and would have its price
automatically set and adjusted, both upon entry and any time
thereafter, in order to comply with the Exchange's rules regarding
market maker quotation requirements and obligations.\12\ It is expected
that market makers will perform the necessary checks to comply with
Regulation SHO, as discussed above, prior to entry of a Market Maker
Peg Order. Upon entry and at any time the order exceeds either the
Defined Limit, as described in Rule 4613(a)(2)(E), or moves a specified
number of percentage points away from the Designated Percentage towards
the then current National Best Bid or National Best Offer, as described
in Rule 4613(a)(2)(F), the Market Maker Peg Order would be priced by
the Exchange at the Designated Percentage \13\ away from the then
current National Best Bid and National Best Offer, or, if no National
Best Bid or National Best Offer, to the Designated Percentage away from
the last reported sale from the responsible single plan processor.
According to NASDAQ, in the absence of a National Best Bid or National
Best Offer and last reported sale, the order will be cancelled or
rejected. Adjustment to the Designated Percentage is designed to avoid
an execution against a Market Maker Peg Order that would initiate a
single stock circuit breaker. In the event of an execution against a
Market Maker Peg Order that reduces the size of the Market Maker Peg
Order below one round lot, the market maker would need to enter a new
order, after performing the regulatory checks discussed above, to
satisfy their obligations under Rule 4613.\14\ In the event that
pricing the Market Maker Peg Order at the Designated Percentage away
from the then current National Best Bid and National Best Offer, or, if
no National Best Bid or National Best Offer, to the Designated
Percentage away from the last reported sale from the responsible single
plan processor would result in the order exceeding its limit price, the
order will be cancelled or rejected.
---------------------------------------------------------------------------
\11\ Rule 4751(f)(4) defines Pegged Orders.
\12\ The Market Maker Peg Order is one-sided so a market maker
seeking to use Market Maker Peg Orders to comply with the Exchange's
rules regarding market maker quotation requirements would need to
submit both a bid and an offer using the order type.
\13\ The Designated Percentage is the individual stock pause
trigger percentage under Rule 4120(a)(11) (or comparable rule of
another exchange) less two (2) percentage points. See Rule
4613(a)(2)(D).
\14\ Rule 4613 generally sets forth NASDAQ market maker
requirements, which include quotation and pricing obligations, and
the firm quote obligation.
---------------------------------------------------------------------------
NASDAQ is also proposing to allow a market maker to designate an
offset more aggressive (i.e., smaller) than the Designated Percentage
for any given Market Maker Peg Order. This functionality will allow a
market maker
[[Page 47474]]
to quote at price levels that are closer to the National Best Bid and
National Best Offer if it elects to do so. To use this functionality, a
market maker must designate the desired offset upon order entry.\15\
Thereafter and unlike the default \16\ Market Maker Peg Order, a Market
Maker Peg Order with a market maker-designated offset will have its
price automatically adjusted on a tick-by-tick basis by the System to
maintain the market maker-designated offset from the National Best Bid
or National Best Offer until the order is executed or cancelled.\17\ In
the absence of a National Best Bid or National Best Offer, Market Maker
Peg Orders with a market maker-designated offset will be cancelled or
rejected. In the event that pricing the Market Maker Peg Order at the
market maker-designated offset away from the then current National Best
Bid and National Best Offer would result in the order exceeding its
limit price, the order will be cancelled or rejected.\18\
---------------------------------------------------------------------------
\15\ If a market maker wishes, it can designate a more
aggressive bid while using the Defined Percentage and Defined Limit
for its offer, or vice versa.
\16\ In the absence of an offset designation, a Market Maker Peg
Order will default to using the Defined Percentage and Defined
Limit, and the repricing process whereby, upon reaching the Defined
Limit, the price of a Market Maker Peg Order bid or offer will be
adjusted by the System to the Designated Percentage away from the
then current National Best Bid or National Best Offer, or, if no
National Best Bid or National Best Offer, to the Designated
Percentage away from the last reported sale from the responsible
single plan processor.
\17\ Market Maker Peg Orders with a market maker-designated
offset may be able to qualify as bona-fide market making for
purposes of Regulation SHO, depending on the facts and
circumstances. A market maker entering such an order must consider
the factors set forth by the Commission in determining whether
reliance on the exception from the ``locate'' requirement of Rule
203 for bona-fide market making is appropriate with respect to the
particular Market Maker Peg Order and its designated offset. See
supra note 11.
\18\ The Market Maker Peg Order will be accepted and executable
during System hours. During pre and post-market hours, the wider
Designated Percentage and Defined Limit associated with the 9:30
a.m.-9:45 a.m. and 3:35 p.m.-4:00 p.m. periods under Rule
4613(a)(2)(D) and (E) will be applied.
---------------------------------------------------------------------------
NASDAQ claims that this order-based approach is superior in terms
of the ease in complying with the requirements of the Market Access
Rule and Regulation SHO while also providing similar quote adjusting
functionality to its market makers.\19\ NASDAQ also states that market
makers would have control of order origination, as required by the
Market Access Rule, while also allowing market makers to make marking
and locate determinations prior to order entry, as required by
Regulation SHO. The Exchange claims that this will allow market makers
to fully comply with the requirements of the Market Access Rule and
Regulation SHO, as they would when placing any order, while also
meeting their Exchange market making obligations.\20\
---------------------------------------------------------------------------
\19\ See Notice, supra note 3 at 37088.
\20\ See id.
---------------------------------------------------------------------------
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.\21\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\22\ which
requires, among other things, the rules of an exchange 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. The
Commission finds that the proposed rule change also is designed to
support the principles of Section 11A(a)(1) \23\ of the Act in that it
seeks to assure fair competition among brokers and dealers and among
exchange markets.
---------------------------------------------------------------------------
\21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78k-1(a)(1).
---------------------------------------------------------------------------
The Commission finds that the Exchange's proposal is consistent
with the Act because it provides a means through which market makers
may meet their minimum quoting requirements, which may assist in the
maintenance of fair and orderly markets, provide additional liquidity
to the Exchange, and prevent excessive volatility. At the same time,
the proposal is reasonably designed to assist market makers in
complying with the regulatory requirements of the Market Access Rule
and Regulation SHO. The Commission notes, however, that the Market
Maker Peg Order, like the current AQ system, does not ensure that the
market maker is satisfying the requirements of the Market Access Rule
or Regulation SHO, including the satisfaction of the locate requirement
of Rule 203(b)(1) or an exception thereto. The Commission also notes
that, in the event a Market Maker Peg Order is executed against such
that the Market Maker Peg Order is reduced in size to below one round
lot, the market maker would need to perform the necessary regulatory
checks pursuant to the Market Access Rule and Regulation SHO prior to
entering a new Market Maker Peg Order.
The Commission also believes that providing Exchange market makers
with a transition period, during which they may adequately test the new
functionality of the Market Maker Peg Order, will serve to minimize the
potential market impact caused by the implementation of that order
type. In addition, by allowing market makers to enter a Market Maker
Peg Order that is priced more aggressively than the Designated
Percentage, the proposed rules are reasonably designed to provide that
quotations submitted by market makers to the Exchange, and displayed to
market participants, bear some relationship to the prevailing market
price.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change, as modified by Amendment No. 1,
(SR-NASDAQ-2012-066) be, and hereby is, approved.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------
\25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19363 Filed 8-7-12; 8:45 am]
BILLING CODE 8011-01-P