[Federal Register Volume 77, Number 158 (Wednesday, August 15, 2012)]
[Notices]
[Pages 49034-49035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-20040]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67639; File No. SR-NASDAQ-2012-071]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change To Amend Rule 4758(a)(1)(A) To Reflect 
a Change in NASDAQ's Routing Functionality

August 10, 2012.

I. Introduction

    On June 14, 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 amend Rule 4758(a)(1)(A) to reflect a change in 
NASDAQ's routing functionality. The proposed rule change was published 
for comment in the Federal Register on June 29, 2012.\3\ The Commission 
received no comment letters regarding the proposed rule change. 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. 67246 (June 25, 
2012), 77 FR 38875 (``Notice'').
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II. Description

    NASDAQ has proposed to amend Rule 4758(a)(1)(A) to reflect a change 
in NASDAQ's order routing functionality, which will allow routable 
orders \4\ to simultaneously execute against NASDAQ available shares 
and route to other markets for execution of the remainder of the order. 
Currently, when a routable order is entered into the NASDAQ system, the 
NASDAQ book is first checked for available shares. If such an order is 
not filled or filled only partially, then the order is routed to away 
markets with the best bid or best offer pursuant to NASDAQ's System 
routing table.\5\
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    \4\ For purposes of this filing, a ``routable order'' is an 
order entered into the NASDAQ System, which is not of an Order Type 
precluded from routing to other markets.
    \5\ The ``System routing table'' is the proprietary process for 
determining the specific trading venues to which the System routes 
orders and the order in which it routes them. See Rule 
4758(a)(1)(A).
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    NASDAQ stated that it has observed that upon partial execution of a 
routable order at NASDAQ market participants often react to the order 
by cancelling their orders on other markets and entering new orders at 
inferior prices. This occurs because the current process directs the 
order to NASDAQ before attempting to access available liquidity at 
other markets and thereby allows market participants to react to the 
execution (an effect known as ``market impact'' or ``information 
leakage''). As a consequence, the available shares at the away market 
are no longer available, resulting in a lower likelihood of 
successfully accessing liquidity on away markets (i.e., the ``fill 
rate'') and an increased likelihood of ultimately receiving an 
execution at an inferior price. As such, NASDAQ has proposed to address 
this by changing how the routing process will operate.
    NASDAQ has proposed to execute routable orders against the NASDAQ 
book for available shares and to simultaneously route any remaining 
shares to additional markets. Specifically, under the proposed change a 
routable order would attempt to execute against the available shares at

[[Page 49035]]

NASDAQ and, to the extent the order would not be filled by such 
available shares, NASDAQ would simultaneously route the remainder of 
the order to other venues, according to NASDAQ's System routing table, 
in a manner consistent with Regulation NMS (i.e., satisfying all 
displayed protected quotes). In the event that the amount of shares on 
other markets is insufficient to completely fill the order, or the 
order fails to completely execute, NASDAQ would then post the remaining 
shares on the NASDAQ book or cancel the remaining shares per the routed 
order's instructions. NASDAQ believes that this simultaneous execution 
against NASDAQ available shares and routing to other venues' shares 
will avoid the deleterious effect of market impact discussed above and 
result in overall faster and better executions of its members' routable 
orders.
    NASDAQ noted, in its proposal, that it is not changing the 
execution and routing sequence of all routable orders. The TFTY, SAVE, 
SOLV, and CART orders are designed to execute serially as part of their 
strategies, which is generally to reduce the blended fees associated 
with transacting on multiple markets. As such, simultaneous routing of 
such orders would not result in a better execution in terms of the 
goals of these routable order types.

III. Discussion and Commission's 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.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\7\ 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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    \6\ 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).
    \7\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change meets these requirements in that it 
promotes efficiency in the market, and should, as represented by 
NASDAQ, increase the likelihood that a routable order will receive 
faster and better executions. As a result, the proposed rule change 
could improve NASDAQ's ability to effectively process routable orders. 
For these reasons, the Commission believes that the proposed change is 
consistent with Section 6(b)(5) of the Act.\8\
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    \8\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-NASDAQ-2012-071) is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-20040 Filed 8-14-12; 8:45 am]
BILLING CODE 8011-01-P