[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40223-40225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15931]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69880; File No. SR-NASDAQ-2013-090]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend Exchange Rule 4754 Governing the NASDAQ Closing Cross 
(``Cross'')

June 27, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 20, 2013, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II 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 amend Exchange Rule 4754 governing the NASDAQ 
Closing Cross (``Cross'') to specify contingency plans for determining 
the NASDAQ Official Closing Price (``NOCP'') in the event NASDAQ 
experiences a system disruption that precludes normal execution of the 
Cross pursuant to Rule 4754.
    The text of the proposed rule change is attached as Exhibit 5.\3\
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    \3\ The Commission notes that Exhibit 5 is attached to the 
filing, not to this Notice.
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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. 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
    Background. Since June of 2002, NASDAQ has published contingency 
plans in the event the NASDAQ closing process was to be disrupted 
during the annual reconstitution of the Russell indexes. The Russell-
targeted contingency plans began as a series of scenarios, and the set 
has accreted new scenarios from year to year as NASDAQ's system and the 
market-wide trading ecosystem have evolved. NASDAQ has established a 
pattern of communication and testing of contingency plans to ensure 
that NASDAQ, its members, and the public are prepared to implement the 
contingency plans if needed.
    While NASDAQ has communicated the contingency plans broadly to its 
members and to the investing public, NASDAQ has never included those

[[Page 40224]]

contingency plans in NASDAQ's rule manual. NASDAQ has determined to 
approach contingency planning differently than in the past, and it has 
also determined to add the contingency plans to NASDAQ's rule manual.
    The Contingency Closing Cross process begins with communication. 
Under the proposal, when NASDAQ experiences a disruption that will 
preclude execution of the standard Closing Cross, the President of 
NASDAQ or any Executive Vice President designated by the President will 
be authorized to invoke the Contingency Procedures. When that occurs, 
NASDAQ will at the earliest possible time communicate to members and 
the public its determination to implement the Contingency Closing Cross 
process. NASDAQ will communicate with members and the public via system 
status alerts on NASDAQTrader.com, as well as via Equity Trader Alerts 
and emails to pre-established notification lists.
    NASDAQ is proposing to use a single method for determining the NOCP 
in response to any situation in which NASDAQ's standard closing cross 
process fails to operate properly. NASDAQ will employ a single offline 
process to determine the price, size, and component executions for the 
closing cross trade in any and all affected securities on a security-
by-security basis. NASDAQ believes that a single offline process will 
address potential failures in the NASDAQ execution system due to its 
separation from that system and its ability to draw on stored order 
files regardless of any impairment to the execution system.\4\
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    \4\ NASDAQ maintains a database of all orders entered into the 
execution system, as well as other data regarding order processing. 
The database is independent of and isolated from the execution 
system and network and, as a result, it can operate regardless of 
impairment to those systems. NASDAQ will operate the contingency 
process from a server that is also independent of and isolated from 
the execution system and network, and that is supported by multiple 
redundant backups.
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    The first step in NASDAQ's proposed Contingency Closing Cross is to 
determine the proper closing price. If the standard closing cross 
process fails in any security, NASDAQ will identify the last 
consolidated regular way trade reported by the network processor before 
4:00:00:00 p.m. for an NMS Security and it will use that price as the 
NOCP. In the event an impacted security has no consolidated last sale 
price (i.e. the security has not traded during the day), NASDAQ will 
have no NOCP and no Contingency Cross for that security. NASDAQ will 
report each NOCP to the network processor as soon as practical using 
existing closing modifiers.
    Once NASDAQ has identified the NOCP for a given security, NASDAQ 
will operate a modified closing cross to determine the number of shares 
and the specific orders that can be executed at the NOCP. Only ``on 
close'' orders will participate in the Contingency Closing Cross. All 
Market-on-Close (``MOC''), Limit-on-Close (``LOC'') and Imbalance Only 
orders received and not cancelled prior to 3:50 p.m., as well as all 
Imbalance Only orders received between 3:50 and 4:00 p.m. will be 
eligible to participate. Resting DAY orders will not be eligible to 
participate because the contingency closing cross will be an offline 
process and it will be unable to interact with the continuous book.
    Once NASDAQ has identified orders eligible to participate in the 
Contingency Closing Cross and able to execute at the NOCP, NASDAQ will 
execute on a price-time priority basis, the maximum number of shares 
able to execute at the NOCP. If an order imbalance exists in the MOC 
and LOC interest that is marketable at the NOCP, NASDAQ will select 
Imbalance Only orders on the side of the market that is short of 
trading interest (in price/time priority) in order to maximize the 
number of paired shares to execute at the NOCP.
    Once NASDAQ has completed the Contingency Closing Cross, it will 
report the results to the appropriate network processor and deliver 
execution reports to members. NASDAQ will publish the NOCP and total 
shares executed in the Contingency Closing Cross using the proper trade 
report modifiers already utilized by the processors.\5\ Additionally, 
NASDAQ will deliver component executions to participants via a flat 
data file formatted in DROP protocol.\6\
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    \5\ NASDAQ will report both an official closing price and a bulk 
trade report for each Closing Cross.
    \6\ ``DROP'' is a proprietary protocol that NASDAQ uses to 
deliver real-time execution information to members using the NASDAQ 
system. It facilitates members' efforts to monitor, track, enter, 
and cancel orders.
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    After hours trading will begin either as scheduled at 4:00 p.m. or 
upon resolution of the disruption that triggered NASDAQ to operate the 
Contingency Closing Cross.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general, and furthers the objectives of 
Section 6(b)(5),\8\ 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. 
The proposal is consistent with this provision in that it will ensure 
that the Exchange continues to operate a fair and orderly market and to 
provide for an effective pricing mechanism for the critical period of 
the market close. The proposed independent, off-line process improves 
NASDAQ's ability to maintain a fair and orderly market when the NASDAQ 
execution system or network is impaired for any reason.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The proposed Contingency Procedures for the Closing Cross are 
designed to preserve NASDAQ's ability to move quickly to establish a 
reliable closing price under unusual conditions. By simplifying and 
codifying the Contingency Procedures, NASDAQ also enables NASDAQ 
members to plan for the contingencies, including the ability to test 
their systems and how they will interact with NASDAQ's systems in the 
event NASDAQ triggers the Contingency Procedures.

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 protect the other markets and 
investors from harm that a NASDAQ disruption could impose. In 
actuality, the proposal is pro-competitive because it promotes fair and 
orderly markets and investor protection, which in turn will buttress 
investor confidence and attract more investors into U.S. equities 
markets. NASDAQ has never used contingency planning by other exchanges 
as a competitive weapon; nor has any competitor used NASDAQ's planning 
against it.

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

    Written comments were neither solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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

[[Page 40225]]

operative for 30 days from the date on which it was filed, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) 
of Rule 19b-4 thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing.\11\ However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest.\12\ The Exchange has requested that the Commission 
waive the 30-day operative delay so that the Exchange can establish 
this process prior to the Russell Reconstitution on June 28, 2013 and 
notes that there is significant benefit to investors from providing 
certainty prior to that date. The Commission believes that the waiver 
of the 30-day operative delay is consistent with the protection of 
investors and the public interest because the proposed rule will 
provide certainty regarding the contingency procedures to market 
participants prior to the date of the Russell Reconstitution. 
Therefore, the Commission designates the proposal operative upon 
filing.\13\
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ Id.
    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-2013-090 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-2013-090. 
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 offices 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-2013-090, and should be submitted on or before July 24, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15931 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P