[Federal Register Volume 81, Number 40 (Tuesday, March 1, 2016)]
[Notices]
[Pages 10687-10690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04359]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77226; File No. SR-NASDAQ-2016-023]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rules 4702 and 4703

February 24, 2016,
    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 10, 2016, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 10688]]

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

    The Exchange proposes to a proposed [sic] rule change to amend Rule 
4702(b)(9)(B) to harmonize the processing of Orders with a Pegging 
Attribute or that are designated for routing, which are eligible to 
participate in the Opening Cross. The Exchange is also proposing to 
make minor technical corrections to Rules 4702 and 4703.
    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
    Rule 4702(b) concerns NASDAQ's Order Types \3\ and provides a 
description of the various Order Attributes \4\ available to NASDAQ 
Participants.\5\ NASDAQ is proposing to harmonize treatment of Orders 
with a Pegging Order Attribute and Orders that are designated for 
routing pursuant to Rule 4758(a) (``Routable Orders'') entered between 
9:28 a.m. ET and initiation of the NASDAQ Opening Cross.\6\ The 
Exchange is also making minor technical corrections to Rules 4702 and 
4703.
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    \3\ The term ``Order'' means an instruction to trade a specified 
number of shares in a specified System Security submitted to the 
NASDAQ Market Center by a Participant. An ``Order Type'' is a 
standardized set of instructions associated with an Order that 
define how it will behave with respect to pricing, execution, and/or 
posting to the NASDAQ Book when submitted to NASDAQ. An ``Order 
Attribute'' is a further set of variable instructions that may be 
associated with an Order to further define how it will behave with 
respect to pricing, execution, and/or posting to the NASDAQ Book 
when submitted to NASDAQ. The available Order Types and Order 
Attributes, and the Order Attributes that may be associated with 
particular Order Types, are described in Rules 4702 and 4703. One or 
more Order Attributes may be assigned to a single Order; provided, 
however, that if the use of multiple Order Attributes would provide 
contradictory instructions to an Order, the System will reject the 
Order or remove non-conforming Order Attributes. See Rule 4701(e).
    \4\ Id.
    \5\ See Rule 4701(c).
    \6\ See Rule 4752 for a description of NASDAQ's opening process, 
including the Opening Cross.
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    All Order Types, except Supplemental Orders,\7\ participate in the 
Opening Cross if the Order has a Time-in-Force \8\ that would cause it 
to be active at the time of the Opening Cross.\9\ Time-in-Force is an 
Order Attribute \10\ selected by the Participant that provides the 
period of time that the NASDAQ System \11\ will hold the Order for 
potential execution. Participants specify an Order's Time-in-Force by 
designating a time at which the Order will become active and a time at 
which the Order will cease to be active. If the Participant enters an 
Order for participation in the Opening Cross \12\ prior to completion 
thereof and with a Time-in-Force that continues after the time of the 
Opening Cross, the Order will participate in the Opening Cross like an 
LOO Order,\13\ while operating thereafter (if unexecuted) in accordance 
with its designated Order Type and Order Attributes (if not executed in 
full in the NASDAQ Opening Cross, held by the System as discussed 
below, or cancelled by the Participant). Such an Order may be referred 
to as an ``Opening Cross/Market Hours Order.''
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    \7\ A Supplemental Order is an Order Type with a Non-Display 
Order Attribute that is held on the NASDAQ Book in order to provide 
liquidity at the NBBO through a special execution process described 
in Rule 4757(a)(1)(D). See Rule 4702(b)(6)(A).
    \8\ See Rule 4703(a).
    \9\ As described in Rule 4703(l), Market On Open (``MOO'') 
Orders, Limit On Open (``LOO'') Orders, and Opening Imbalance Only 
(``OIO'') Orders participate in the NASDAQ Opening Cross in the 
manner specified in Rule 4752. Other order types eligible to 
participate in the Opening Cross operate as ``Market Hours Orders'' 
or ``Open Eligible Interest'' as specified in Rule 4752. Rule 
4703(l), also notes that Supplemental Orders, Retail Orders, and RPI 
Orders are ineligible to participate in the Opening Cross. As 
discussed herein, the Exchange is deleting references to Retail 
Orders and RPI Orders since they are no longer available on NASDAQ.
    \10\ See Rule 4701(e).
    \11\ As defined by Rule 4701(a).
    \12\ An Order may be designated by a Participant for 
participation in the Opening Cross by adding a ``flag'' to the 
order, or an Order may participate in the Opening Cross without such 
a flag if, by its nature, must participate (e.g., LOO Order).
    \13\ See Rule 4702(b)(9).
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    In addition to a Time-in-Force, an Order may have other Attributes 
associated with it, such as price, size, eligibility to participate in 
the NASDAQ Opening and Closing Crosses, Pegging, and whether the Order 
is Routable.\14\ An Order that is designated as Routable \15\ employs 
one of several Routing Options described in Rule 4758(a)(1)(A). 
Routable Day Orders eligible to participate in the Opening Cross that 
are entered into the System prior to 9:28 a.m. ET are added to the 
NASDAQ book as they were entered by the Participant (i.e., Order Type 
and Order Attributes).\16\ If such an Order has a Time-in-Force that 
will allow it to continue after completion of the Opening Cross and the 
Order was not executed fully in the Cross, the order will be entered 
into the NASDAQ book for participation in Market Hours \17\ trading.
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    \14\ See Rule 4703.
    \15\ See Rule 4703(f) for a description of the Routing Order 
Attribute.
    \16\ Any Order with a Pegging Order Attribute entered prior to 
9:28 a.m. ET, other than a Market Pegging designated for 
participation in the Opening Cross, is not accepted by the System. 
See Rule 4703(d) for a discussion of Pegging.
    \17\ See Rule 4701(g).
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    An Order may have a Pegging Attribute. Pegging is an Order 
Attribute that allows an Order to have its price automatically set with 
reference to the NBBO; provided, however, that if NASDAQ is the sole 
market center at the Best Bid or Best Offer (as applicable), then the 
price of any Displayed Order with Pegging will be set with reference to 
the highest bid or lowest offer disseminated by a market center other 
than NASDAQ.\18\
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    \18\ See Rule 4703(d).
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    There are three varieties of Pegging; Primary, Market, and 
Midpoint. Primary Pegging means Pegging with reference to the Inside 
Quotation on the same side of the market. Market Pegging means Pegging 
with reference to the Inside Quotation on the opposite side of the 
market. Midpoint Pegging means Pegging with reference to the midpoint 
between the Inside Bid and the Inside Offer. NASDAQ also has a Market 
Maker Peg Order, which is an Order Type designed to assist a Market 
Maker in maintaining a continuous two-sided quotation at a displayed 
price that is compliant with the quotation requirements for Market 
Makers set forth in Rule 4613(a)(2).\19\ Pegging is available only 
during Market Hours. Orders with a Pegging Attribute entered into the 
System prior to 9:28 a.m. ET are rejected, unless the Order is a Market 
Maker Peg Order or a Market Peg Order designated to participate in the 
Opening Cross.
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    \19\ See Rule 4702(a)(7) [sic]. A Market Maker Peg Order may be 
entered through RASH, FIX or QIX only.

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[[Page 10689]]

    Opening Cross/Market Hours Orders entered into the System at 9:28 
a.m. ET up to initiation of the Opening Cross (the ``Late Period'') are 
designated as ``Late Market Hours Orders,'' \20\ which are handled 
differently than Orders entered prior to the Late Period. Under the 
current rule, an Opening Cross/Market Hours Order that is entered 
during the Late Period will be (i) held and entered into the System 
after the completion of the NASDAQ Opening Cross if it has been 
assigned a Pegging Attribute or Routing Attribute, (ii) treated as an 
``Opening Imbalance Only Orders [sic]'' or ``OIO Orders [sic]'' \21\ 
for the purposes of the Opening Cross and, if not executed in full, 
entered into the System after the completion of the NASDAQ Opening 
Cross if entered through RASH, QIX, or FIX but not assigned a Pegging 
Attribute or Routing Attribute, or (iii) treated as an OIO Order and 
cancelled after the NASDAQ Opening Cross if entered through OUCH or 
FLITE.\22\ An Opening Cross/Market Hours Order entered through RASH or 
FIX after the time of the NASDAQ Opening Cross will be accepted but the 
NASDAQ Opening Cross flag will be ignored. A Routable Order flagged to 
participate in the NASDAQ Opening Cross with a Time-in-Force other than 
IOC and entered at or after 9:28 a.m. will be held and entered into the 
System after the NASDAQ Opening Cross. All other LOO Orders and Opening 
Cross/Market Hours Orders entered at or after 9:28 a.m. will be 
rejected.
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    \20\ See Rule 4752(a)(7).
    \21\ An OIO Order is an Order Type entered with a price that may 
be executed only in the Opening Cross and only against MOO Orders 
(Rule 4702(b)(8)), LOO Orders (Rule 4702(b)(9)), or Early Market 
Hours Orders (Rule 4752(a)(7)). See Rule 4702(b)(10).
    \22\ NASDAQ maintains several communications protocols for 
Participants to use in entering Orders and sending other messages to 
the NASDAQ Market Center. These are OUCH, RASH, QIX, and FLITE, 
which are NASDAQ proprietary protocols, and FIX, which is a non-
proprietary protocol. See http://www.nasdaqtrader.com/Trader.aspx?id=TradingSpecs for a description of the various order 
entry port specifications.
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Proposed Changes
    The Exchange is proposing to make two changes to how it handles 
Opening Cross/Market Hours Order entered into the System during the 
Late Period. Currently, the Exchange will hold Orders entered during 
the Late Period that have been assigned certain Pegging and Routing 
Attributes and enter them into the System after the completion of the 
Opening Cross,\23\ while it will reject Orders entered during the Late 
Period with certain other Pegging and Routing Attributes. As discussed 
below, Opening Cross/Market Hours Orders entered into the System during 
the Late Period that have a Pegging Attribute or Routing Attribute are 
held and entered into the System after the completion of the Opening 
Cross with the exception of Orders with a Primary or Midpoint Pegging 
Attribute, which are instead rejected by the System, or Orders with a 
DOT or LIST Routing Attribute, which are instead converted by the 
System to an OIO Order.\24\
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    \23\ The Exchange notes that the System will hold such an Order 
notwithstanding that the market participant flags the Order as 
eligible for participation in the Opening Cross.
    \24\ DOT and LIST Orders entered during the Late Period are sent 
to the Primary Listing Market for the security. If an Order in a 
NASDAQ-listed security is assigned a DOT or LIST Routing Attribute 
and entered into the System during the Late Period, the System will 
convert the Order to an OIO Order for participation in the Opening 
Cross.
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    First, the Exchange is proposing to harmonize how it handles 
Opening Cross/Market Hours Orders entered into the System during the 
Late Period that have a Pegging Attribute. As noted above, the Exchange 
will hold an Order entered into the System during the Late Period that 
has been assigned a Market Pegging Attribute and will enter it into the 
System after the completion of the Opening Cross. The Exchange is 
proposing to instead reject all Orders with a Market, Midpoint, or 
Primary Pegging attribute.\25\ The Exchange notes that a Market Pegged 
Order entered during the Late Period is the only type of Order with a 
Pegging Attribute currently held by the System until after completion 
of the Opening Cross. Primary Pegged and Midpoint Pegged Orders entered 
during the Late Period are currently rejected. NASDAQ is proposing to 
harmonize the treatment of Market, Midpoint, or Primary Pegged Orders 
entered during the Late Period by rejecting any such Order. As a 
consequence, the Exchange is amending Rule 4702(b)(9) to reflect that 
an Order with a Market, Midpoint, or Primary Pegging Attribute entered 
during the Late Period will be rejected.
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    \25\ Market Maker Peg Orders entered during the Late Period are 
accepted and treated as OIO Orders for potential participation in 
the Opening Cross, and thereafter entered into the continuous book 
as a Market Maker Peg Order if not executed in full in the Opening 
Cross. The Exchange is proposing to add new text to Rule 
4702(b)(9)(B) to make clear that Market Maker Peg Orders are not 
included as an Order that will be rejected by the System. The 
Exchange is not proposing to change how Market Maker Peg Orders are 
handled.
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    Second, the Exchange is proposing to harmonize how all Routable 
Orders entered during the Late Period that are eligible to participate 
in the Opening Cross are handled. Currently, any Order employing a DOT 
\26\ or LIST \27\ Routing Option that is eligible to participate in the 
Opening Cross and that is entered into the System during the Late 
Period is either sent to the appropriate primary listing market for 
participation in that market's opening process or, in the case of 
securities whose primary listing market is NASDAQ or another market not 
supported by DOT, converted by the System to OIO Order.\28\ If such a 
converted Routable Order does not execute in the Opening Cross, then it 
reverts back to the Order Type as was entered by the Participant for 
participation in Market Hours trading. By contrast, an Order employing 
any of the other Routing Options under Rule 4758(a)(1)(A) that is 
eligible to participate in the Opening Cross and that is entered into 
the System during the Late Period is held by the System until 
completion of the Opening Cross and thereafter is added to the 
continuous order book for Market Hours trading, consistent with the 
Order Type and Attributes, which is consistent with the current rule as 
discussed above. The Exchange is proposing to harmonize how all 
Routable Orders entered during the Late Period that are eligible to 
participate in the Opening Cross are handled by converting all such 
Orders into OIO Orders and, upon completion of the Opening Cross, 
converting any such Order that is not fully executed back to its 
original Order Type and Attributes.\29\
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    \26\ DOT is a Routing Option that allows the entering firm to 
designate an Order for participation in the NYSE or NYSE MKT opening 
or closing processes. See Rule 4758(a)(1)(A)(i).
    \27\ LIST is a Routing Option designed to allow orders to 
participate in the opening and/or closing process of the primary 
listing market for a security. See Rule 4758(a)(1)(A)(x).
    \28\ An Order with a Market Pegging Attribute entered during the 
Late Period is rejected back to the Participant. In both scenarios, 
the Orders are not eligible to participate in the Opening Cross 
since Pegging is available only during Market Hours. See Rule 
4703(d).
    \29\ An Order with a TIF of IOC would be canceled upon 
completion of the Opening Cross instead of being converted back to 
an IOC Order.
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    Last, the Exchange is making technical corrections to Rules 4702 
and 4703 to remove references to Retail Orders and RPI Orders, which 
were erroneously included in the rules when they were adopted.\30\
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    \30\ Retail Orders and RPI Orders were part of the Retail Price 
Improvement Program under Rule 4780, which was eliminated. See 
Securities Exchange Act Release No. 75252 (June 22, 2015), 80 FR 
36865 (June 26, 2015) (SR-NASDAQ-2015-024).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with

[[Page 10690]]

Section 6 of the Act,\31\ in general, and further the objectives of 
Section 6(b)(5) of the Act,\32\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and 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; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \31\ 15 U.S.C. 78f.
    \32\ 15 U.S.C. 78f(b)(5).
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    Specifically, the proposed changes promote just and equitable 
principles of trade and perfects the mechanisms of a free and open 
market and the national market system by providing greater clarity 
concerning the System's operation with respect to Pegged and Routable 
Orders during the Opening Cross process and how such orders with a 
Time-in-Force characteristic that allows them to trade during Market 
Hours are processed upon initiation of the Opening Cross.
    The proposed change will contribute to the protection of investors 
and the public interest by bringing consistency to the processing of 
Orders in the Opening Cross, thereby avoiding any Participant confusion 
that may be caused by dissimilar treatment of Routable and Pegged 
Orders. With respect to Routable Orders, uniformly converting such 
Orders, which are designated to participate in the Opening Cross, is 
consistent with a Participant's intent to first potentially execute 
during the Opening Cross and, to the extent not fully executed, 
thereafter join Market Hours trading consistent with the Order Type and 
Routing Option employed, unless otherwise cancelled after the Opening 
Cross as discussed above.
    With respect to Pegged Orders, uniformly canceling all Pegged 
Orders as described under Rule 4703(d) is consistent with the nature of 
a Pegged Order, which is only available during Market Hours. Further, 
these changes simplify the processing making it easier for all 
participants to understand how their orders behave with respect to the 
Opening Cross and thereafter. The proposed elimination of references to 
Retail Orders and RPI Orders will also serve to avoid potential 
Participant confusion arising from including references thereto in 
light of the elimination of the Retail Price Improvement Program.

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

    The Exchange 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. 
Specifically, the change is designed to promote consistency in the 
treatment of Pegged and Routable Orders in the Opening Cross. Such a 
change does not place a burden on competition between market 
participants as the changes are applied consistently to all 
participants. Moreover, the proposed change does not impose a burden on 
competition among exchanges as they are done to clarify NASDAQ's rules 
and do not impact competition.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be 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-2016-023 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-2016-023. 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 the 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-2016-023 and 
should be submitted on or before March 22, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
Robert W. Errett,
Deputy Secretary.
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    \33\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-04359 Filed 2-29-16; 8:45 am]
 BILLING CODE 8011-01-P