[Federal Register Volume 77, Number 161 (Monday, August 20, 2012)]
[Notices]
[Pages 50191-50193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-20318]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67655; File No. SR-NASDAQ-2012-059]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove 
Proposed Rule Change To Establish ``Benchmark Orders'' Under NASDAQ 
Rule 4751(f)

August 14, 2012.

I. Introduction

    On May 1, 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 establish various ``Benchmark Orders'' under 
NASDAQ Rule 4751(f). The proposed rule change was published for comment 
in the Federal Register on May 17, 2012.\3\ The Commission received no 
comments on the proposal. On June 26, 2012, the Commission extended to 
August 15, 2012, the time period in which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\4\ This 
order institutes proceedings under Section 19(b)(2)(B) of the Act to 
determine whether to approve or disapprove 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. 66972 (May 11, 
2012), 77 FR 29435 (May 17, 2012) (``Notice'').
    \4\ See Securities Exchange Act Release No. 67258 (June 26, 
2012), 77 FR 39314 (July 2, 2012).

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[[Page 50192]]

II. Description of the Proposal

    As set forth in more detail in the Notice, the Exchange has 
proposed to offer Benchmark Orders that would seek to achieve the 
performance of a specified benchmark--Volume Weighted Average Price 
(``VWAP''), Time Weighted Average Price (``TWAP''), or Percent of 
Volume (``POV'')--over a specified period of time for a specified 
security.\5\ The entering party would specify the benchmark, period of 
time, and security, as well as the other order information common to 
all order types, such as buy/sell side, shares and price.\6\
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    \5\ See proposed NASDAQ Rule 4751(f)(15).
    \6\ Id.; see also Notice, 77 FR at 29436.
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    Benchmark Orders would be received by NASDAQ but by their terms 
would not be executable by the NASDAQ matching engine upon entry.\7\ 
Rather, NASDAQ would direct them to a system application 
(``Application'') that is licensed from a third-party provider and 
dedicated to processing Benchmark Orders.\8\ The Application would 
process Benchmark Orders by generating ``Child Orders'' in a manner 
designed to achieve the desired benchmark performance, i.e., VWAP, TWAP 
or POV, in accordance with the member's instructions.\9\ Child Orders 
would be executed within the NASDAQ system under NASDAQ's existing 
rules, or made available for routing under NASDAQ's current routing 
rules.\10\ The Application would not be capable of executing Child 
Orders, but instead would send Child Orders, using the proper system 
protocol, to the NADAQ matching engine or to the NASDAQ router as 
needed to complete the Benchmark Order.\11\ NASDAQ represents that it 
considers the Application to be a functional offering of the NASDAQ 
Stock Market, and that it would be integrated closely with the NASDAQ 
system and provided to members subject to NASDAQ's obligations and 
responsibilities as a self-regulatory organization.\12\
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    \7\ See proposed NASDAQ Rule 4751(f)(15); see also Notice, 77 FR 
at 29435-36.
    \8\ See Notice, 77 FR at 29436.
    \9\ See proposed NASDAQ Rule 4751(f)(15); see also Notice, 77 FR 
at 29435-36.
    \10\ See Notice, 77 FR at 29435. Child Orders that require 
routing would be routed by NASDAQ Execution Services (``NES''), 
NASDAQ's wholly-owned routing broker-dealer. See Notice, 77 FR at 
29436 n.8. In addition, fees applicable to existing orders and 
trades would apply to Child Orders. See Notice, 77 FR at 29436.
    \11\ See Notice, 77 FR at 29435-36.
    \12\ See Notice, 77 FR at 29436.
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    NASDAQ also represents that it would test the Application 
rigorously and regularly, monitor the Application performance on a 
real-time and continuous basis, and have access to the technology, 
employees, books and records of the third-party provider that are 
related to the Application and its interaction with NASDAQ.\13\ In 
addition, NASDAQ represents that it would maintain control of and 
responsibility for the Application.\14\
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    \13\ Id.
    \14\ See Notice, 77 FR at 29437.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2012-059 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposed rule change 
should be approved or disapproved. Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change. Institution of these proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described in greater detail 
below, the Commission seeks and encourages interested persons to 
provide additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.
    As discussed above, the Benchmark Order would allow NASDAQ members 
to enter a single order in a single security that seeks to match the 
performance of one of three selected benchmarks--VWAP, TWAP or POV--
over a pre-determined period of time. Benchmark Orders would not be 
executed by the NASDAQ matching engine, but would be directed to the 
Application that is dedicated to processing Benchmark Orders. The 
Application would generate and send Child Orders to the NASDAQ matching 
engine or to the NASDAQ router, pursuant to current NASDAQ order 
handling and routing rules, in a manner designed to achieve the desired 
benchmark selected by the entering firm.
    Pursuant to Section 19(b)(2)(B), the Commission is providing notice 
of the grounds for disapproval under consideration. The sections of the 
Act applicable to the proposed rule change that provide the grounds for 
approval or disapproval under consideration are Section 6(b)(5) \15\ 
and Section 6(b)(8).\16\ Section 6(b)(5) of the Act \17\ 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; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act 
\18\ requires that the rules of the exchange do not impose any burden 
on competition not necessary or appropriate in furtherance of the Act.
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(b)(8).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78f(b)(8).
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    NASDAQ's proposal raises concerns under the Act regarding whether 
Benchmark Orders and Child Orders would be subject to appropriate 
controls to manage risk. In particular, the Commission is concerned 
that NASDAQ has not adequately addressed how or whether Child Orders, 
which would be generated solely by the Application and presumably 
outside the control and supervision of the broker-dealer firm that 
entered the initial Benchmark Order, would be subject to adequate pre-
trade risk checks. NASDAQ's proposal makes reference to the Market 
Access Rule, Rule 15c3-5 under the Act,\19\ which requires pre-trade 
controls to be applied by brokers entering orders onto an exchange but 
NASDAQ's proposal does not indicate how or whether pre-trade controls 
would be applied to Child Orders generated by the Application.\20\ The 
application of appropriate risk controls under Rule 15c3-5 is 
critically important to maintaining a robust market infrastructure 
supporting the protection of investors, investor confidence, and fair, 
orderly, and efficient markets for all participants.
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    \19\ 17 CFR 240.15c3-5. Rule 15c3-5 is designed to ensure that 
broker-dealers appropriately control the risks associated with 
market access, so as not to jeopardize their own financial 
condition, that of other market participants, the integrity of 
trading on the securities markets, or the stability of the financial 
system. See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792 at 69794 (November 15, 2010).
    \20\ See Notice, 77 FR at 29436.
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    Another concern stems from the requirements in Sections 6(b)(5) and 
6(b)(8) of the Act that exchange rules not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers, or to 
impose an unnecessary burden on competition. NASDAQ's Benchmark Order 
functionality would compete with the algorithms that member firms and 
other market participants currently use to achieve VWAP, TWAP or POV 
performance. The Commission is concerned whether NASDAQ's proposal

[[Page 50193]]

would enable Benchmark Orders and Child Orders generated by the 
Application to receive unfair or unreasonable preferential treatment by 
NASDAQ (such as through more effective access to the matching engine) 
as compared to orders generated by market participants that may choose 
to use a competing algorithm.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any others they may have identified 
with the Exchange's proposal. In particular, the Commission invites the 
written views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8) under the Act, or any 
other provision of the Act or rule or regulation thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\21\
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    \21\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    The Commission is asking that commenters address the merit of 
NASDAQ's statements in support of the proposal, in addition to any 
other comments they may wish to submit about the proposed rule change. 
Specifically, the Commission is requesting comment on the following:
     What are commenters' views as to whether NASDAQ has 
adequately addressed the potential risks to the market related to the 
handling of Child Orders by NASDAQ's Application? How could such risks 
be addressed and mitigated by NASDAQ?
     What are commenters' views with regard to whether NASDAQ's 
proposal to offer trading algorithms that would compete with other 
market participants would impose an undue burden on competition or 
result in unfair discrimination? In this regard, has NASDAQ provided 
adequate assurances and information regarding whether or not it would 
offer preferential treatment to its service as compared to similar 
competing services offered by other market participants? For example, 
what are commenters' views regarding whether NASDAQ's proposal could 
allow for more effective access to the matching engine that could 
confer advantages related to timing, priority, or otherwise?
    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposal should be approved or 
disapproved by October 4, 2012. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 19, 2012. 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-2012-059 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-2012-059. 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 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of NASDAQ. 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-2012-059 and should be submitted 
on or before October 4, 2012. Rebuttal comments should be submitted by 
October 19, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(57).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20318 Filed 8-17-12; 8:45 am]
BILLING CODE 8011-01-P