[Federal Register Volume 78, Number 60 (Thursday, March 28, 2013)]
[Notices]
[Pages 19037-19040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07184]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69217; File No. SR-NASDAQ-2013-045]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Exchange Rule 4120

March 22, 2013.
    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 11, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to amend Exchange Rule 4120 to establish rules to 
comply with the requirements of the Plan to Address Extraordinary 
Market Volatility submitted to the Commission pursuant to Rule 608 of 
Regulation NMS.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, at the Commission's Public Reference Room, and 
on the Commission's Web site at http://www.sec.gov.

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
    The Exchange proposes to amend Exchange Rule 4120 to establish 
rules to comply with the requirements of the Plan to Address 
Extraordinary Market Volatility submitted to the Commission pursuant to 
Rule 608 of Regulation NMS under the Act (the ``Plan''). The Exchange 
proposes to adopt the changes for a pilot period that coincides with 
the pilot period for the Plan, which is currently scheduled as a one-
year pilot to begin on April 8, 2013.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 68953 (Feb. 20, 
2013) (Notice of Filing and Immediate Effectiveness of the Second 
Amendment to the National Market System Plan to Address 
Extraordinary Market Volatility, File No. 4-631).
---------------------------------------------------------------------------

Background
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the equities exchanges and FINRA have implemented market-wide measures 
designed to restore investor confidence by reducing the potential for 
excessive market volatility. Among the

[[Page 19038]]

measures adopted include pilot plans for stock-by-stock trading pauses 
\4\ and related changes to the equities market clearly erroneous 
execution rules \5\ and more stringent equities market maker quoting 
requirements.\6\ On May 31, 2012, the Commission approved the Plan, as 
amended, on a one-year pilot basis.\7\ In addition, the Commission 
approved changes to the equities market-wide circuit breaker rules on a 
pilot basis to coincide with the pilot period for the Plan.\8\
---------------------------------------------------------------------------

    \4\ See, e.g., NASDAQ Rule 4120.
    \5\ See, e.g., NASDAQ Rule 11890.
    \6\ See, e.g., NASDAQ Rule 4613(a).
    \7\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, 
on a Pilot Basis, the National Market System Plan To Address 
Extraordinary Market Volatility).
    \8\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
---------------------------------------------------------------------------

    The Plan is designed to prevent trades in individual NMS Stocks 
from occurring outside of specified Price Bands.\9\ As described more 
fully below, the requirements of the Plan are coupled with Trading 
Pauses to accommodate more fundamental price moves (as opposed to 
erroneous trades or momentary gaps in liquidity). All trading centers 
in NMS Stocks, including both those operated by Participants and those 
operated by members of Participants, are required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the requirements specified in the 
Plan.\10\ As set forth in more detail in the Plan, Price Bands 
consisting of a Lower Price Band and an Upper Price Band for each NMS 
Stock are calculated by the Processors.\11\ When the National Best Bid 
(Offer) is below (above) the Lower (Upper) Price Band, the Processors 
shall disseminate such National Best Bid (Offer) with an appropriate 
flag identifying it as non-executable. When the National Best Bid 
(Offer) is equal to the Upper (Lower) Price Band, the Processors shall 
distribute such National Best Bid (Offer) with an appropriate flag 
identifying it as a Limit State Quotation.\12\ All trading centers in 
NMS Stocks must maintain written policies and procedures that are 
reasonably designed to prevent the display of offers below the Lower 
Price Band and bids above the Upper Price Band for NMS Stocks. 
Notwithstanding this requirement, the Processor shall display an offer 
below the Lower Price Band or a bid above the Upper Price Band, but 
with a flag that it is non-executable. Such bids or offers shall not be 
included in the National Best Bid or National Best Offer 
calculations.\13\
---------------------------------------------------------------------------

    \9\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \10\ The Exchange is a Participant in the Plan.
    \11\ See Section (V)(A) of the Plan.
    \12\ See Section VI(A) of the Plan.
    \13\ See Section VI(A)(3) of the Plan.
---------------------------------------------------------------------------

    Trading in an NMS Stock immediately enters a Limit State if the 
National Best Offer (Bid) equals but does not cross the Lower (Upper) 
Price Band.\14\ Trading for an NMS stock exits a Limit State if, within 
15 seconds of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the market does not exit a 
Limit State within 15 seconds, then the Primary Listing Exchange would 
declare a five-minute Trading Pause pursuant to Section VII of the LULD 
Plan, which would be applicable to all markets trading the 
security.\15\ In addition, the Plan defines a Straddle State as when 
the National Best Bid (Offer) is below (above) the Lower (Upper) Price 
Band and the NMS Stock is not in a Limit State. For example, assume the 
Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is 
$10.50, such NMS stock would be in a Straddle State if the National 
Best Bid were below $9.50, and therefore non-executable, and the 
National Best Offer were above $9.50 (including a National Best Offer 
that could be above $10.50). If an NMS Stock is in a Straddle State and 
trading in that stock deviates from normal trading characteristics, the 
Primary Listing Exchange may declare a Trading Pause for that NMS 
Stock.
---------------------------------------------------------------------------

    \14\ See Section VI(B)(1) of the Plan.
    \15\ The primary listing market would declare a trading pause in 
an NMS Stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS Stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
---------------------------------------------------------------------------

Proposed Amendment to Rule 4120
    The Exchange is required by the Plan to establish, maintain, and 
enforce written policies and procedures that are reasonably designed to 
comply with the limit up-limit down and trading pause requirements 
specified in the Plan. In response to the new Plan, the Exchange 
proposes to amend its Rules accordingly.
    The Exchange proposes to add Rule 4120(a)(12)(A)(1) to define that 
``Plan'' means the Plan to Address Extraordinary Market Volatility 
Submitted to the Securities and Exchange Commission Pursuant to Rule 
608 of Regulation NMS under the Securities Exchange Act of 1934, 
Exhibit A to Securities Exchange Act Release No. 67091 (May 31, 2012), 
77 FR 33498 (June 6, 2012). In addition, proposed Rule 
4120(a)(12)(A)(2) provides that all capitalized terms not otherwise 
defined in this Rule shall have the meanings set forth in the Plan or 
Exchange rules, as applicable.
    The Exchange proposes to add Rule 4120(a)(12)(C) to provide that 
Exchange members shall comply with the applicable provisions of the 
Plan. The Exchange believes that this requirement will help ensure the 
compliance by its members with the provisions of the Plan as required 
pursuant to Section II(B) of the Plan.\16\
---------------------------------------------------------------------------

    \16\ See Section II(B) of the Plan.
---------------------------------------------------------------------------

    The Exchange proposes to add Rule 4120(a)(12)(D) to provide that 
Exchange systems shall not display or execute buy (sell) interest above 
(below) the Upper (Lower) Price Bands, unless such interest is 
specifically exempted under the Plan. The Exchange believes that this 
requirement is reasonably designed to help ensure the compliance with 
the limit up-limit down and trading pause requirements specified in the 
Plan, by preventing executions outside the Price Bands as required 
pursuant to Section VI(A)(1) of the Plan.\17\
---------------------------------------------------------------------------

    \17\ See Section VI(A)(1) of the Plan.
---------------------------------------------------------------------------

    The Exchange proposes Rules regarding the treatment of certain 
trading interest on the Exchange in order to prevent executions outside 
the Price Bands and to comply with the new LULD Plan. In particular, 
the Exchange proposes to add Rule 4120(a)(12)(E) to provide that 
Exchange systems shall re-price or cancel buy (sell) interest that is 
priced or could be executed above (below) the Upper (Lower) Price Band. 
Any interest that is repriced pursuant to this Rule shall receive a new 
time stamp and new execution priority.\18\ Specifically, the Exchange 
proposes the following provisions regarding the repricing or canceling 
of certain trading interest:
---------------------------------------------------------------------------

    \18\ NASDAQ believes it is appropriate for re-priced orders to 
receive a new time stamp and new execution priority rather than jump 
ahead of previously-entered orders. In effect, an adjustment in 
price is equivalent to the entry of a new order; that function is 
simply being automated.
---------------------------------------------------------------------------

     Market Orders. If a market order with a time in force 
other than Immediate or Cancel cannot be fully executed at or within 
the Price Bands, Exchange systems shall post the unexecuted portion of 
the buy (sell) market order at the Upper (Lower) Price Band.

[[Page 19039]]

     Limit-priced Interest. Both displayable and non-
displayable incoming limit-priced interest to buy (sell) that is priced 
above (below) the Upper (Lower) Price Band shall be repriced to the 
Upper (Lower) Price Band. The treatment of limit-priced interest will 
depend upon its order entry protocol. For limit-priced orders entered 
via the OUCH protocol, the order shall be re-priced upon entry only if 
the Price Bands are such that the price of the limit-priced interest to 
buy (sell) would be above (below) the upper (lower) Price Band. Once 
slid, the treatment of that interest will further depend upon whether 
it becomes passive or aggressive interest. Specifically, if the order 
becomes passively priced such that the Price Bands move and the price 
of the order to buy (sell) would be below (below) the lower (upper) 
Price Band, the order will not be re-priced again. Rather, the order 
will either remain on the book at the same price or be cancelled back 
to the entering party, depending on how the entering party has 
configured its order entry port. If the interest becomes aggressively 
priced such that the Price Bands move and the price of the order to buy 
(sell) would be above (below) the upper (lower) Price Band, the order 
will not be re-priced again. Rather, the order will be cancelled.
     For limit-priced orders entered via RASH or FIX protocols, 
the order shall priced upon order entry and then shall be eligible to 
be repriced by the system multiple times if the Price Bands move such 
that the price of resting limit-priced interest to buy (sell) would be 
above (below) the upper (lower) Price Band. Once slid, if the Price 
Bands move such that the price of resting limit interest to buy (sell) 
would be below (above) the upper (lower) Price Band the order will 
continue to be repriced either to its original limit price or to the 
new price bands, whichever is less aggressive.\19\
---------------------------------------------------------------------------

    \19\ The NASDAQ system will treat limit-priced orders 
differently depending upon whether the entering firm uses the OUCH 
protocol on one hand or the RASH or FIX protocols on the other. This 
different treatment stems from the ultimate destination for orders 
entered via those protocols. Orders entered via OUCH are destined 
for direct entry to the NASDAQ matching engine. As such, they are 
not eligible for special treatments or calculations, including re-
pricing. Orders entered via RASH (short for ``routing and special 
handling'') and FIX are destined for the indirect entry into the 
matching engine. They are eligible for special treatments and 
calculations, including re-pricing. This difference in the protocols 
is longstanding and well-known to NASDAQ members.
---------------------------------------------------------------------------

     IOC Orders. If an IOC order cannot be fully executed at or 
within the Price Bands, Exchange systems shall cancel any unexecuted 
portion of the IOC Order.
     Routable Orders. With the exception of Directed Orders, 
and orders submitted using either the DOTI or DOTZ routing strategy, 
the Exchange systems shall not route buy (sell) interest to an away 
market displaying a sell (buy) quote that is above (below) the Upper 
(Lower) Price Band. Orders that are eligible to be routed to away 
destinations will be price slid before routing if the buy (sell) is 
priced above (below) the Upper (Lower) Price Band.
     Auction Orders. On close or halt auction orders are not 
price slid or cancelled due to LULD price bands.
     Sell Short Orders. During a Short Sale Price Test, as 
defined in Rule 4763(b), Short Sale Orders priced below the Lower Price 
Band shall be repriced to the higher of the Lower Price Band or the 
Permitted Price, as defined in Rule 4763(b).
    The Exchange believes these provisions are reasonably designed to 
prevent executions outside the Price Bands as required by the limit up-
limit down and trading pause requirements specified in the Plan.
    The Exchanges also proposes to amend the Rules regarding Trading 
Pauses to correspond with the LULD Plan. The Exchange proposes to 
provide that during Phase 1 of the Plan, a Trading Pause in Tier 1 NMS 
Stocks shall be subject to the requirements of the Plan and Exchange 
Rule 4753 and a Trading Pause in Tier 2 NMS Stocks shall be subject to 
the requirements set forth in Exchange 4120(a)(11). Once the Plan has 
been fully implemented and all NMS Stocks are subject to the Plan, a 
Trading Pause under the Plan shall be subject to Exchange Rule 
4120(a)(12). Consistent with these changes, the Exchange proposes to 
delete the threshold requirement of 10% or more with respect to 
securities included in the S&P 500[supreg] Index and the Russell 
1000[supreg] Index, because these Tier 1 NMS Stocks will be subject to 
the requirements under Exchange Rule 4120(a)(11). These proposed 
changes are designed to comply with Section VIII of the Plan to ensure 
implementation of the Plan's requirements.\20\
---------------------------------------------------------------------------

    \20\ See Section VIII of the Plan.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \21\ in general, and furthers the objectives of 
Section 6(b)(5),\22\ in particular, in that it is designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposal will ensure that the Exchange systems will not display 
or execute trading interest outside the Price Bands in a manner that 
promotes just and equitable principles of trade and removes impediments 
to, and perfects the mechanism of, a free and open market and a 
national market system.
    The proposal will also ensure that the trading interest on the 
Exchange is either repriced or canceled in a manner that is consistent 
with just and equitable principles of trade and removes impediments to, 
and perfects the mechanism of, a free and open market and a national 
market system. Specifically, when trading interest is re-priced to 
comply with the requirements of the Plan, that trading interest will 
receive a new timestamp and new execution priority. Re-pricing is the 
automated equivalent of the entry of a new order which would, if done 
manually, result in a new timestamp and placement in the execution 
queue. The proposal will help market participants to continue to trade 
NMS Stocks within Price Bands in compliance with the Plan with 
certainty on how orders and trading interest will be treated. Reducing 
uncertainty regarding the treatment and priority of trading interest 
with the Price Bands should help encourage market participants to 
continue to provide liquidity during extraordinary market volatility.
    The proposal will also ensure that orders in NMS Stocks are not 
routed to other exchanges in situations where an execution may occur 
outside Price Bands, and thus promotes just and equitable principles of 
trade and removes impediments to, and perfects the mechanism of, a free 
and open market and a national market system.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
proposal is specifically designed to ensure cooperation between and 
among all national securities exchanges and FINRA to promote uniform 
and effective regulation of the national market system. The proposal is 
specifically aimed at reducing competition among exchanges that is 
based on differences in regulations,

[[Page 19040]]

otherwise known as regulatory arbitrage. In actuality, the proposal is 
pro-competitive because it promotes fair and orderly markets and 
investor protection, which in turn will restore investor confidence and 
attract more investors into U.S. equities markets.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \23\ and Rule 19b-4(f)(6) thereunder.\24\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \24\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and 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. The 
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \25\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\26\ the Commission 
may 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 designate an operative date of April 8, 2013. The 
Commission believes that waiving the operative delay and designating 
April 8, 2013 as the operative date of the proposed rule change is 
consistent with the protection of investors and the public interest 
because such waiver would allow the proposed rule change to be 
operative on the initial date of Plan operations. Accordingly, the 
Commission hereby grants the Exchange's request and designates an 
operative date of April 8, 2013.\27\
---------------------------------------------------------------------------

    \25\ 17 CFR 240.19b-4(f)(6).
    \26\ 17 CFR 240.19b-4(f)(6)(iii).
    \27\ For purposes only of waiving the operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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.

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-2013-045 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-2013-045. 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2013-045 and should 
be submitted on or before April 18, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority. \28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-07184 Filed 3-27-13; 8:45 am]
BILLING CODE 8011-01-P