[Federal Register Volume 79, Number 78 (Wednesday, April 23, 2014)]
[Notices]
[Pages 22744-22746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09205]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71961; File No. SR-NASDAQ-2014-036]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Clarify the Rule Governing 
the Operation of the Closing Cross in Circumstances Where a Pause 
Triggered Under the LULD Plan Would Be Triggered After 3:50 p.m. EST

April 17, 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 April 9, 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 the 
Substance of the Proposed Rule Change

    (a) The Exchange proposes to amend Exchange Rule 4754 governing the 
NASDAQ Closing Cross (``Cross'') to accommodate changes in market 
structure triggered by Phase 2 of the Plan To Address Extraordinary 
Market Volatility submitted to the Commission pursuant to Rule 608 of 
Regulation NMS (``LULD Plan''). Specifically, NASDAQ proposes to 
clarify the rule governing the operation of the Cross in circumstances 
where a pause triggered under the LULD Plan would be triggered after 
3:50 p.m. EST.
    Changes to the rule text are shown in the attached Exhibit 5.\3\ A 
copy of this filing is available on the Exchange's Web site at http://nasdaq.cchwallstreet.com, at NASDAQ's principal office, and at the 
Commission's Public Reference Room.
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    \3\ The Commission notes the Exhibit 5 is attached to the filing 
submitted by the Exchange but is not attached to the published 
notice of the filing.
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    (b) Not applicable.
    (c) Not applicable.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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. As set forth in detail in prior filings, on May 31, 
2012, the Commission approved the LULD Plan, as amended, as a one-year 
pilot, which began on April 8, 2013.\4\ The LULD Plan is designed to 
prevent trades in individual NMS Stocks from occurring outside of 
specified Price Bands calculated and disseminated by the Network 
Processors.\5\
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    \4\ 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). Unless otherwise specified, 
capitalized terms used in this rule filing are based on the defined 
terms of the Plan.
    \5\ See Section (V)(A) of the LULD Plan.
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    Under Phase 2 (Amendment No. 6) of the Plan,\6\ the Plan's 
operative time is to be extended from 3:45 p.m. until 4:00 p.m.; full 
implementation of Phase 2 was scheduled to take effect on February 24, 
2014. In anticipation of the February 24th implementation date, NASDAQ 
proposed to establish the LULD Closing Cross, an alternate mechanism to 
close a security that is subject to a Trading Pause within the last ten 
minutes of regular trading. The Commission approved that proposal on 
February 21, 2014.\7\ However, NASDAQ delayed final implementation of 
Phase 2 for NASDAQ-listed securities \8\ when the final industry-wide 
test of the new LULD Closing Cross failed to meet NASDAQ's testing 
standards. NASDAQ conducted successful, additional testing on March 15 
and 22, 2014 and plans further testing on April 12, 2014. Assuming all 
testing is successful, NASDAQ would complete final implementation of 
Phase 2 of the LULD Plan shortly thereafter, on a date to be announced 
to all market participants through a widely disseminated notice.
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    \6\ See Securities Exchange Act Release No. 71247 (January 7, 
2014), 79 FR 2204 (January 13, 2014) (File No. 4-631).
    \7\ See Securities Exchange Act Release No. 71597 (Feb. 21, 
2014), 79 FR 11169 (Feb. 27, 2014) (SR-NASDAQ-2014-004).
    \8\ Phase 2 of the LULD Plan was implemented for securities 
listed on other exchanges as planned on February 24, 2014.
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    During the testing conducted to date, NASDAQ has identified several 
minor, technical clarifications to the approved rule governing the LULD 
Closing Cross, NASDAQ Rule 4754(b)(6), as well as the description of 
that rule in SR-NASDAQ-2014-004. First, NASDAQ is clarifying the timing 
of the commencement of the After Hours Trading session and the 
treatment of Good-til-Cancelled (``GTC'') orders in the event the LULD 
Closing Cross is delayed until 5:00 p.m. due to continuing volatility. 
In the approved proposal, NASDAQ stated:

    If this condition persists until 5:00 p.m., NASDAQ will not 
conduct an LULD Closing Cross in that security and shall instead use 
the last-sale on NASDAQ as the NASDAQ Official Closing Price in that 
security for that trading day. In that event, all orders will be 
cancelled back to the entering firms, and after hours trading will 
begin at 5:00 p.m.\9\
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    \9\ 79 FR at 2494.

In addition, Rule 4754 states that ``After Hours Trading shall commence 
after the LULD Closing Cross executes unless the volatility condition 
persists until 5:00 p.m. in which case there will [sic] After Hours 
Trading will begin at 5:00 p.m.'' \10\ and ``NASDAQ shall continue 
disseminating the NOII every five seconds until the execution of the 
LULD Closing Cross or until 5:00 p.m. whichever is later.'' \11\
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    \10\ Rule 4754(b)(6)(A)(iii).
    \11\ Rule 4754(a)(6)(B).
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    In fact, the process of cancelling orders would not be 
instantaneous, and After Hours Trading would begin only when the 
process is complete. Moreover, all orders are not automatically 
cancelled back to the entering firm. GTC orders require special 
treatment due to the fact that firms presume that they will remain on 
the book overnight, potentially over many nights. The actual process is 
better described as follows:

    If this condition persists until 5:00 p.m., NASDAQ will not 
conduct an LULD Closing Cross in that security and shall instead use 
the last-sale on NASDAQ as the NASDAQ Official Closing Price in that 
security for that trading day. In that event, NASDAQ will commence a 
process of cancelling all orders (other than orders with a time-in-
force of good-till-cancelled) back to the entering firms, and after 
hours trading will commence upon the completion of that process. In 
the case of both Market Hours GTC orders and Good-til-Market Close 
orders, the orders will

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be removed from the continuous book and placed in a suspended state. 
Entering firms will have the option to cancel those orders or allow 
them to be re-entered into the system on the following trading 
day.\12\
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    \12\ Similarly, NASDAQ is amending Rule 4754(b)(6)(A)(iii) and 
(B) to describe the timing of the commencement of After Hours 
Trading and the treatment of GTC orders in circumstances where an 
LULD Closing Cross has not occurred by 5:00 p.m.

    The second clarification relates to the entry of orders during an 
LULD Trading Pause prior to and after 4:00 p.m. Rule 4754, as approved, 
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states that:

    During the pause and prior to 4:00 p.m., entry of market orders 
is prohibited. New Imbalance Only Orders may also be entered and 
modified to increase shares represented, but can't be cancelled 
during the pause.\13\
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    \13\ Rule 4754(b)(6)(C)(iii) (emphasis added).

    In fact, NASDAQ should have said that entry of market pegged 
orders, rather than market orders, is prohibited after 4:00 p.m. As 
provided in Rule 4751, a market pegged order is an order whose price is 
pegged to the opposite side of the market. In addition, NASDAQ rules do 
not currently define a market order. By omitting the word ``pegged'', 
the proposal improperly implied that NASDAQ's system otherwise accepts 
market orders at this or any other time of day. Accordingly, NASDAQ is 
proposing to modify the text of the rule to make this clarification.
    The third clarification also relates to the entry of orders during 
the LULD Trading Pause. Rule 4754, as approved, states that:

    During the pause and prior to 4:00 p.m., new market and limit 
orders of any order type and any time in force may be entered, 
modified, and cancelled and may participate in the LULD Closing 
Cross.\14\
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    \14\ Id.

The words ``market and limit'' in this context was inadvertently 
confusing in two ways. First, as stated above, NASDAQ rules do not 
define ``market'' orders as such. Therefore, the inclusion of that term 
is erroneous. Second, the reference to orders of any type or time in 
force is vague. It is clearer in this context to describe what is 
prohibited rather than what is permitted. Finally, the use of ``market 
and limit'' could be read to refer to Market on Close and Limit on 
Close orders. However, as otherwise provided in Rule 4754, MOC and LOC 
orders may not be submitted after 3:50:00, and NASDAQ was not proposing 
to modify this restriction. Accordingly, for the avoidance of doubt, 
NASDAQ proposes to clarify the treatment of MOC and LOC orders as 
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follows:

    During the pause and prior to 4:00 p.m., new orders (other than 
MOC and LOC orders, which may not be submitted after 3:50) may be 
entered, modified, and cancelled and may participate in the LULD 
Closing Cross.

    NASDAQ believes that this modification will make clearer to members 
that, as in all circumstances, MOC and LOC orders cannot be cancelled 
after 3:50 p.m. without special intervention by NASDAQ personnel, and 
that they cannot be cancelled after 3:55 p.m. under any circumstances.
    Finally, NASDAQ is modifying the text of Rule 4754(b)(6) to replace 
a statement that a stock subject to a Trading Pause will ``open'' with 
a more accurate statement that the stock will ``resume trading'' and is 
amending Rule 4754(b)(6)(C)(iii) to correct a typographical error.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \15\ in general, and furthers the objectives of 
Section 6(b)(5),\16\ 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 will comply with the LULD Plan. The LULD Closing 
Cross, as originally proposed, is designed to balance the need for 
transparency and liquidity with the need to move quickly from a Trading 
Pause to a closing price. NASDAQ believes that it has accomplished 
these goals to the maximum extent possible. The Exchange also believes 
that the proposed clarifications, which are minor and technical in 
nature, are consistent with the Act in that they make clearer the 
existing Exchange rules and the obligations those rule impose on 
members.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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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 comply with the LULD Plan and, 
thereby, to ensure cooperation between and among all national 
securities exchanges and FINRA to promote uniform and effective 
regulation of the national market system. 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.

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 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 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 \17\ and Rule 19b-
4(f)(6)(iii) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because it will ensure that the text of Rule 4754 fully conforms to the 
operation of the LULD Closing Cross upon launch. For this reason, the 
Commission waives the operative delay and designates the proposed rule 
change to be operative upon filing.\19\
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    \19\ 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. If the Commission takes such action, the 
Commission shall institute proceedings

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to determine whether the proposed rule should be approved or 
disapproved.

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-2014-036 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-036. 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 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 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-2014-036, and should be submitted on or before 
May 14, 2014.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09205 Filed 4-22-14; 8:45 am]
BILLING CODE 8011-01-P