[Federal Register Volume 79, Number 36 (Monday, February 24, 2014)]
[Notices]
[Pages 10218-10220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-03781]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71555; File No. SR-NASDAQ-2014-017]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Add a Risk Management Tool Commonly Known as a ``Kill Switch''

February 18, 2014.
    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 February 4, 2014, 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 the Exchange. 
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 Substance 
of the Proposed Rule Change

    The Exchange is filing a proposed rule change to add a risk 
management tool commonly known as a ``Kill Switch'' as set forth in 
proposed NASDAQ Rule 6130. The new Kill Switch feature will be optional 
and will be offered at no charge effective March 1, 2014. The text of 
the proposed rule change is below. Proposed new language is italicized; 
proposed deletions are in brackets.
* * * * *

6130. NASDAQ Kill Switch

    (a) Definition. The NASDAQ Kill Switch is an optional tool offered 
at no charge that enables participants to establish a pre-determined 
level of Net Notional Risk Exposure (``NNRE''), to receive 
notifications as the value of executed orders approaches the NNRE 
level, and to have order entry ports disabled and open orders 
administratively cancelled when the value of executed orders exceeds 
the NNRE level. 
    (b) Net Notional Risk Exposure. Participants may set a NNRE for 
each MPID individually. Each participant is responsible for 
establishing and maintaining its NNRE. Participants may adjust NNRE 
values intra-day.
    (c) Notification. Participants will receive notifications when the 
total value of executed orders associated with an MPID exceeds 50, 75, 
85, 90, and 95 percent of the NNRE value. When the NNRE is exceeded, 
the notification will include the total number of orders cancelled and 
remaining open in the System.
    (d) Operation. Unless cancellation is prohibited by Rule 4752, 
4753, or 4754, a Kill Switch when triggered shall result in the 
immediate cancellation of all open orders of any type or duration 
entered by the participant via the affected MPID, and in the immediate 
prevention of order entry of any type via the affected MPID. The 
participant must request reactivation of the MPID before trading will 
be reauthorized.
* * * * *

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
    Background. NASDAQ has offered a Pre-Trade Risk Management 
(``PRM'') toolset since 2002, before NASDAQ began operating as a 
national securities exchange and before the Commission adopted the 
Market Access Rule.\3\ PRM provides participant firms with the ability 
to set a wide range of parameters for orders to facilitate pre-trade 
protection by creating a PRM module defined to represent checks 
desired. Using PRM, firms can increase controls on their trading 
activity and the trading activity of their clients and customers at the 
order level, including the opportunity to prevent potentially

[[Page 10219]]

erroneous transactions. PRM validates orders entered on PRM-enabled 
ports prior to allowing those orders into its matching engine and, 
using parameters set by the subscriber, determines if the order should 
be sent for fulfillment. PRM users may choose to set PRM Order Checks, 
Aggregate Total Checks within a PRM Module, and subscribe to PRM 
Workstation Add-ons to an existing NASDAQ Workstation or WeblinkACT 
2.0. PRM manages risk by checking each order, before it is accepted 
into the System, against certain parameters pre-specified by the user 
within a module, such as maximum order size or value, order type 
restrictions, market session restrictions (pre/post market), security 
restrictions, including per-security limits, restricted stock lists, 
and certain other criteria.
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    \3\ SEC Rule 15c3-5.
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    In order for a participant firm to subscribe, at least one PRM 
Module per market participant ID (``MPID'') is required, but a user may 
have multiple PRM Module subscriptions per MPID, depending on the type 
and number of ports designated as PRM ports. A PRM Module is created to 
validate individual orders against pre-specified parameters. Aggregate 
Total Checks allow users to limit overall daily trading activity based 
on Buy, Sell, and/or Net trading limits. These daily trading activity 
limits may be established at an aggregate limit and/or security 
specific limit per PRM Module. Participant firms may subscribe to the 
PRM Workstation Add-on to an existing NASDAQ Workstation or WeblinkACT 
2.0 for a fee.
    Current Proposal. NASDAQ will provide a tool to allow market 
participants to control, for each Market Participant Identifier 
(``MPID''), the total Net Notional Risk Exposure (``NNRE'') they are 
prepared to accept per trading session, from 04:00 to 20:00 EST. If a 
market participant exceeds their pre-established NNRE the access ports 
associated with that MPID will be disabled and open exposure on the 
NASDAQ Market under that MPID will be administratively cancelled.
    The Kill Switch tool will operate on an MPID level, meaning that 
participants will need to set a unique NNRE for each MPID used for 
order entry. Participants can set limits for none, one, some, or all 
MPIDs registered to their firm. The tool will operate on all orders 
attributable to each MPID. Therefore, participants that utilize a 
single MPID for multiple trading desks will be unable to establish a 
different NNRE for each trading desk. Participants may adjust their 
NNRE values intraday. The NNRE will be calculated daily, meaning that 
it will reset at the start of each trading day.
    With the limited exceptions noted below, the Kill Switch will 
operate at all times and on all orders when the NASDAQ System is open 
(i.e., 4:00 a.m. to 8:00 p.m.) and it will cancel all open interest of 
all order types and all time-in-force durations. The Kill Switch 
function will not cancel orders directed to a NASDAQ Cross during the 
period leading up to a NASDAQ Cross when order cancellation is 
prohibited. Specifically, the Kill Switch will not cancel Cross orders 
just prior to an Opening Cross (9:28:00-:09:30:00),\4\ a Halt or 
Initial Public Opening Cross,\5\ or a Closing Cross (15:50:00-
16:00:00).\6\ With these exceptions, the Kill Switch will operate 
universally whenever the NASDAQ System is open.
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    \4\ See NASDAQ Rule 4752(a).
    \5\ See NASDAQ Rule 4753(a).
    \6\ See NASDAQ Rule 4754(a).
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    The tool will generate and send an email to a market participant as 
it approaches and then exceeds the pre-determined NNRE for an MPID. As 
a Participant executes trades during the trading session, an email will 
be sent to associated Infocenter accounts containing their current 
proximity to the NNRE limit they had previously established. Such 
notification will occur when the executed value reaches 50, 75, 85, 90, 
and 95 percent of the pre-determined NNRE limit.
    In the event the NNRE limit is exceeded, the order entry port 
associated with the affected MPID will be disabled and open orders in 
the System will be administratively cancelled. A notification will be 
sent that indicates that the breach has occurred and that order flow 
from that port has been stopped. It will also include a count of the 
total number of orders cancelled and the total number of auction-
specific orders still exposed.\7\ The notification will also be 
delivered to NASDAQ's trading operations team so that NASDAQ personnel 
are aware and can assist participants in managing their risk exposure.
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    \7\ Auction orders will continue to be available to execute in 
the cross. Auction orders that do not execute in the intended cross 
will be cancelled administratively when the cross is complete.
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    After a Kill Switch has been triggered, the participant will be 
required to contact NASDAQ operations staff in order to re-authorize 
trading under the affected MPID. Participants will be required to 
explain why a Kill Switch was triggered and why it is safe for the 
Exchange to re-authorize the MPID for order entry. Upon such request, 
NASDAQ operations staff will be reactivate the order entry port 
associated with the affected MPID.
    NASDAQ plans to offer the Kill Switch functionality by March 1, 
2014.
2. Statutory Basis
    The rule change proposed in this submission is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\8\ Specifically, the 
proposed change is consistent with Section 6(b)(5) of the Act,\9\ 
because it would promote just and equitable principles of trade, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system, and, in general, protect investors and 
the public interest. The Kill Switch is designed to protect firms and 
investors alike by limiting the risk and damage of potential 
technological or other erroneous trading activity. As such, the Kill 
Switch is an important compliance tool that participants may use to 
help maintain the regulatory integrity of the markets.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. To the contrary, 
the Exchange does not believe that the provision of Kill Switch 
functionality should be the subject of competitive analysis. In that 
regard, the Exchange notes that it has coordinated with other national 
securities exchanges and the Financial Industry Regulatory Authority to 
deliver a standard level of risk management functionality commonly 
known as the Kill Switch.

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

    No written comments were either 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 operative for 30 days from the date on which it was filed, or 
such shorter time

[[Page 10220]]

as the Commission may designate, it has become effective pursuant to 
Section 19(b)(3)(A)(ii) of the Act \10\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\11\ 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. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \10\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \11\ 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.
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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 No. SR-NASDAQ-2014-017 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-2014-017. 
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 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2014-017 and should be submitted by March 17, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-03781 Filed 2-21-14; 8:45 am]
BILLING CODE 8011-01-P