[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Notices]
[Pages 67501-67504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73540; File No. SR-NASDAQ-2014-099]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Cancel-Replacement and Route Timer

November 6, 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 October 28, 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, II, and III 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 Substance 
of the Proposed Rule Change

    NASDAQ proposes to add specificity to the Exchange's options 
trading rules. The NASDAQ Options Market (``NOM'') is Nasdaq's facility 
for executing and routing standardized equity and index options. The 
Exchange proposes to define cancel-replacement orders and also describe 
a route timer in Chapter VI, entitled ``Trading Systems.''
    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, 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, Proposed Rule Change

1. Purpose
    The Exchange is proposing to amend Chapter VI to add additional 
specificity to its rules. The Exchange proposes to amend Section 1, 
Definitions, to define a cancel- replacement order. The Exchange 
proposes to amend Section 11, Order Routing, to add greater specificity 
to the Rulebook concerning a route timer.
Cancel-Replacement Orders
    A market participant today has the option of either sending in a 
cancel order and then separately sending in a new order which serves as 
a replacement of the original order (two separate messages) or sending 
a single cancel-replacement order in one message.
    If an order is submitted to the System and then subsequently a 
cancel order is sent to the System cancelling the original order, the 
original order will be cancelled by the System provided the original 
order was not already filled partially or in its entirety. A subsequent 
replacement order would be treated as a new order by the System and 
will not retain the priority of the cancelled order.
    An order that is entered as one single message (``cancel-
replacement order'')

[[Page 67502]]

containing two orders (versus two messages as described above) will 
also result in the original order being cancelled, provided the 
original order was not already filled partially or in its entirety.\3\ 
The replacement order will be considered a new order by the System and 
will have time priority as of the time that order is entered into the 
System, except in the case that the replacement order only serves to 
reduce the size of the order. A cancel-replacement order which only 
reduces the size of the order will continue to retain the priority of 
the original order.\4\ The replacement order will not retain the 
priority of the cancelled order except when the replacement reduces the 
size of the order and all other terms and conditions are retained. This 
is similar to the manner in which partially executed orders are 
prioritized in the System.
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    \3\ With cancel-replacement orders, the original order is 
automatically canceled or reduced by the number of contracts that 
were executed depending on the volume of the original order that was 
filled. The market participant is required to enter the original 
order reference number when a cancel-replacement order is sent to 
the System as one message.
    \4\ When a cancel-replacement order is sent to the System as one 
message the original order number reference is maintained by the 
System.
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    By way of example, if the original order is for 600 contracts and a 
market participant submits a cancel-replacement order for 600 contracts 
and in doing so, amends a term or condition such as the order type, 
presuming the original order was not filled in its entirety or 
partially, the entire original order would be cancelled. If the 
original order is for 600 contracts and a market participant submits a 
cancel-replacement order for 600 contracts and in doing so, amends a 
term or condition such as the order type, and 600 contracts were 
already filled, the cancel-replacement order would be returned to the 
market participant. If the original order is for 600 contracts and a 
market participant submits a cancel-replacement order for 600 contracts 
and in doing so, amends a term or condition such as the order type, and 
300 contracts were already filled, the order would be modified to 300 
contracts. Finally, if the original order is for 600 contracts and a 
market participant submits a cancel-replacement order solely reducing 
the size of the order by 300 contracts, the order would be modified to 
300 contracts and the original order would retain its priority. In the 
previous examples provided, the orders would not retain the priority of 
the original orders.
    The Exchange proposes to add the following definition in Chapter 
VI, Section 1, ``Cancel-replacement order shall mean a single message 
for the immediate cancellation of a previously received order and the 
replacement of that order with a new order with new terms and 
conditions. If the previously placed order is already filled partially 
or in its entirety, the replacement order is automatically canceled or 
reduced by the number of contracts that were executed. The replacement 
order will not retain the priority of the cancelled order except when 
the replacement order reduces the size of the order and all other terms 
and conditions are retained.'' This language is being added to Section 
1(e)(1) to reflect the manner in which cancel-replacement orders 
function today. This filing does not reflect a change to the System; 
rather, the Exchange is memorializing in its rules the manner in which 
cancel-replacement orders are treated today.
Route Timer
    Today, the System provides a number of routing options pursuant to 
which orders are sent to other available market centers for potential 
execution, per the entering market participant's instructions.\5\ The 
System routing options are SEEK or SRCH. With SEEK and SRCH, an order 
will first check the System for available contracts for execution. 
After checking the System for available contracts, orders are sent to 
other available market centers for potential execution, per the 
entering firm's instructions.
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    \5\ Participants can designate orders as either available for 
routing or not available for routing. See Chapter VI, Sec. 11(a).
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    The Exchange proposes to add language in a new Section 11(a)(1)(C) 
to specify that after an order is initially routed,\6\ pursuant to 
either the SEEK or SRCH routing option, the order will post to the book 
and will be routed after a time period (``Route Timer'') not to exceed 
one second as specified by the Exchange on its Web site provided that 
the order's limit price would lock or cross other market center(s).\7\ 
If, during the Route Timer, any new interest arrives opposite the order 
that is equal to or better than the away best bid or offer (``ABBO'') 
price, the order will trade against such new interest at the ABBO 
price. Eligible unexecuted orders will be routed at the end of the 
Route Timer provided the order was not filled and the order's limit 
price would continue to lock or cross the ABBO. If an order was routed 
with either the SEEK or SRCH routing option, and has size after such 
routing, it will execute against contra side interest in the book, post 
in the book, and route again pursuant to the process described above, 
if applicable, if the order's limit price would lock or cross another 
market center(s).
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    \6\ If an order is only partially routed the portion that was 
not routed will be posted to the book.
    \7\ Pursuant to Section 11(c) of Chapter VI, orders sent by the 
System pursuant to the SEEK and SRCH routing options to other 
markets would not retain time priority with respect to other orders 
in the System. If an order routed pursuant to SEEK or SRCH is 
subsequently returned, in whole or in part, that order, or its 
remainder, will receive a new time stamp reflecting the time of its 
return to the System.
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    This language is being added to Section 11 to reflect the manner in 
which the Exchange imposes a Route Timer on routed orders today to 
permit quote updates to occur prior to subsequent routing. This filing 
does not reflect a change to the System, rather the Exchange is 
memorializing in its rules the manner in which orders are routed today.
    The Exchange also proposes to amend rule text in Section 
11(a)(1)(A) of Chapter VI concerning the SEEK routing option. The 
Exchange proposes to add language which clarifies the differences 
between SEEK and SRCH routing options with respect to contracts that 
remain un-executed after routing and are posted on the book. The 
Exchange proposes to state, ``Once on the book at the limit price, 
should the order subsequently be locked or crossed by another market 
center, the System will not route the order to the locking or crossing 
market center.'' The Exchange believes this language more clearly 
differentiates an order routed pursuant to SEEK as compared to the SRCH 
routing option. An order routed pursuant to the SEEK routing option is 
routable until it is posted at its limit price. Once posted at its 
limit price, an order routed pursuant to the SEEK routing option would 
not continue to route, as compared to an order routed pursuant to the 
SRCH routing option. An order routed pursuant to the SRCH routing 
option is routable for the life of the order. The routing functionality 
is similar to functionality currently on Phlx.\8\
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    \8\ See Phlx Rule 1080(m).
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    The Exchange also proposes to correct a typographical error in 
Chapter VI, Section 11(a)(1).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and

[[Page 67503]]

equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, 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.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal to define cancel-
replacement orders will add transparency to the rules. The Exchange is 
not amending the manner in which the System handles these orders. The 
Exchange is memorializing, in its rules, the method by which orders are 
handled by the System. The Exchange is defining cancel-replacement 
orders within Chapter VI, Section 1.
    Specifically, with respect to cancel-replacement orders that reduce 
size, the Exchange believes that allowing cancel-replacement orders 
where only size is reduced to retain the priority of the original order 
is consistent with the manner in which the Exchange treats partially 
executed orders, which similarly apply the priority of the executed 
portion of the order to the remaining portion of the order. In 
addition, by permitting market participants' orders to remain on the 
book with the original priority and reduced size, the Exchange is 
providing market participants an ability to reduce exposure. The 
Exchange believes that adding transparency and specificity to the Rules 
protects investors and the public interest by reducing the potential 
for investor confusion.
    The Exchange is also memorializing the manner in which the Exchange 
routes unexecuted portions of an order that will be subsequently routed 
to other markets when it comes back and subsequently locks and/or 
crosses the market. The Exchange will continue to re-route eligible 
unexecuted orders pursuant to a Route Timer. Contracts which remain 
unexecuted will be posted to the book provided the order's limit price 
would not lock or cross the ABBO. Specifically, the Exchange is 
describing the Route Timer that applies to eligible unexecuted portions 
of an order which will be subsequently routed. The timer protects 
investors and the public interest by providing a brief time period to 
allow the opportunity for markets to update quotes prior to subsequent 
routes.
    The Exchange seeks to add language concerning the specific manner 
in which the Exchange will handle the routed order by specifying the 
routing methods in which SEEK or SRCH orders will route to the away 
market(s). The Exchange is adding clarifying language to make clear 
that after an order is initially routed, pursuant to either the SEEK or 
SRCH routing option, the order will post to the book and will be routed 
after a time period (``Route Timer'') not to exceed one second as 
specified by the Exchange on its Web site provided that the order would 
lock or cross other market center(s). If, during the Route Timer, any 
new interest arrives opposite the order that is equal to or better than 
the ABBO price, the order will trade against such new interest at the 
ABBO price. Eligible unexecuted orders will be routed at the end of the 
Route Timer provided the order was not filled and it would continue to 
lock or cross the ABBO. If an order was routed with either the SEEK or 
SRCH routing option, and has size after such routing, it will execute 
against contra side interest in the book, post in the book, and route 
again pursuant to the process described above, if applicable, if the 
order would lock or cross another market center(s).
    Further, the proposal to amend rule text in Section 11(a)(1)(A) of 
Chapter VI concerning SEEK orders clarifies the differences between 
SEEK and SRCH routing options with respect to contracts that remain un-
executed after routing and are posted on the book. The Exchange seeks 
to clearly note that once an order routed pursuant to the SEEK routing 
option is on the order book at the limit price, it will not route, 
despite the order locking or crossing another market center. The 
Exchange believes this language more clearly differentiates an order 
routed pursuant to the SEEK routing option as compared to SRCH routing 
option.
    The Exchange believes this language adds specificity and detail to 
the rule text so that market participants may anticipate the manner in 
which orders are handled by the Exchange when routing. The Exchange 
believes that adding transparency and specificity to the Rules protects 
investors and the public interest by reducing the potential for 
investor confusion.
    The Exchange's proposal is intended to provide additional 
specificity to the rules in the manner in which the System treats 
cancel-replacement orders and handles routing of eligible unexecuted 
portions of previously routed orders, which is designed to promote just 
and equitable principles of trade.
    The Exchange is not proposing to amend the manner in which the 
System operates. Cancel-replacement orders have been treated in this 
fashion since NOM was first launched. Further, the Routing Timer for 
subsequent routes has also been in place on NOM since its launch. The 
Exchange is proposing these additions to the rules in order to provide 
greater specificity to the Exchange's rules.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. The Exchange is seeking to provide greater 
transparency in its rules. The amendments are non-substantive and would 
apply to all market participants in the same manner. Permitting cancel-
replacement orders to retain their original priority does not impose a 
burden on competition because the priority is retained only in the 
instance that size alone is changed and only if it is reduced. 
Permitting all market participants to reduce their exposure without 
penalty does not burden competition, rather it promotes competition by 
allowing participants the ability to change their orders in a changing 
market, provided the order was not already partially filled or filled 
in its entirety.

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

    No Written comments were neither solicited nor 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 as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \11\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \12\ 17 CFR 240.19b-4(f)(6).
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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 to determine whether the 
proposed rule should be approved or disapproved. The Exchange has 
provided the Commission

[[Page 67504]]

written notice of its 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.

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-2014-099 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-099. 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 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-2014-099 and should 
be submitted on or before December 4, 2014.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26807 Filed 11-12-14; 8:45 am]
BILLING CODE 8011-01-P