[Federal Register Volume 81, Number 180 (Friday, September 16, 2016)]
[Notices]
[Pages 63815-63818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22255]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78816; File No. SR-NASDAQ-2016-123]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 4770

September 12, 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 August 29, 2016, 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 proposes to amend Rule 4770 to modify certain data 
collection requirements of the Regulation NMS Plan to Implement a Tick 
Size Pilot Program.
    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
    On August 25, 2014, Nasdaq and several other self-regulatory 
organizations (the ``Participants'') filed with the Commission, 
pursuant to Section 11A of the Act \3\ and Rule 608 of Regulation NMS 
thereunder,\4\ the Plan to Implement a Tick Size Pilot Program (the 
``Plan'').\5\ The Participants filed the Plan to comply with an order 
issued by the Commission on June 24, 2014.\6\ The Plan was published 
for comment in the Federal Register on November 7, 2014, and approved 
by the Commission, as modified, on May 6, 2015.\7\
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    \3\ 15 U.S.C. 78k-1.
    \4\ 17 CFR 242.608.
    \5\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \6\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \7\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stock of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan.
    The Plan provides for the creation of a group of Pilot Securities, 
which shall be placed in a control group and three separate test 
groups, with each subject to varying quoting and trading increments. 
Pilot Securities in the control group will be quoted at the current 
tick size increment of $0.01 per share and will trade at the currently 
permitted increments. Pilot Securities in the first test group will be 
quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\8\ Pilot Securities in the 
second test group (``Test Group Two'') will be quoted in $0.05 minimum 
increments and will trade at $0.05 minimum increments subject to a 
midpoint exception, a retail investor order exception, and a negotiated 
trade exception.\9\ Pilot Securities in the third test group (``Test 
Group Three'') will be subject to the same quoting and trading 
increments as Test Group Two, and also will be subject to the ``Trade-
at'' requirement to prevent price matching by a market participant that 
is not displaying at the price of a Trading Center's ``Best Protected 
Bid'' or ``Best Protected Offer,'' unless an enumerated exception 
applies.\10\ In addition to the exceptions provided under Test Group 
Two, an exception for Block Size orders and exceptions that mirror 
those under Rule 611 of Regulation NMS \11\ will apply to the Trade-at 
requirement.
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    \8\ See Section VI(B) of the Plan.
    \9\ See Section VI(C) of the Plan.
    \10\ See Section VI(D) of the Plan.
    \11\ 17 CFR 242.611.
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    The Plan also requires a Trading Center \12\ or a Market Maker \13\ 
to collect and transmit certain data to its designated examining 
authority (``DEA''), and requires DEAs to transmit this data to the 
Commission. Participants that operate a Trading Center also are 
required under the Plan to collect certain data, which is then 
transmitted directly to the Commission. With respect to Trading 
Centers, Appendix B.I to the Plan (Market Quality Statistics) requires 
a Trading Center to submit to the Participant that is its DEA a variety 
of market quality statistics. Appendix B.II to the Plan (Market and 
Marketable Limit Order Data) requires a Trading Center to

[[Page 63816]]

submit information to its DEA relating to market orders and marketable 
limit orders, including the time of order receipt, order type, the 
order size, and the National Best Bid or National Best Offer (``NBBO'') 
quoted price.
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    \12\ The Plan incorporates the definition of a ``Trading 
Center'' from Rule 600(b)(78) of Regulation NMS. Regulation NMS 
defines a ``Trading Center'' as ``a national securities exchange or 
national securities association that operates an SRO trading 
facility, an alternative trading system, an exchange market maker, 
an OTC market maker, or any other broker or dealer that executes 
orders internally by trading as principal or crossing orders as 
agent.'' See 17 CFR 242.600(b).
    \13\ The Plan defines a Market Maker as ``a dealer registered 
with any self-regulatory organization, in accordance with the rules 
thereof, as (i) a market maker or (ii) a liquidity provider with an 
obligation to maintain continuous, two-sided trading interest.''
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    With respect to Market Makers, Appendix B.III requires a 
Participant that is a national securities exchange to collect daily 
Market Maker Registration statistics. Appendix B.IV requires a 
Participant to collect data related to Market Maker participation with 
respect to each Market Maker engaging in trading activity on a Trading 
Center operated by the Participant. Appendix C.I requires a Participant 
to collect data related to Market Maker profitability from each Market 
Maker for which it is the DEA. Appendix C.II requires the Participant, 
as DEA, to aggregate the Appendix C.I data, and to transmit this data 
to the Commission.
    The Commission approved the Pilot on a two-year basis, with 
implementation to begin no later than May 6, 2016.\14\ On November 6, 
2015, the SEC exempted the Participants from implementing the Pilot 
until October 3, 2016.\15\ As set forth in Appendices B and C to the 
Plan, data that is reported pursuant to the appendices shall be 
provided for dates starting six months prior to the Pilot Period 
through six months after the end of the Pilot Period. Under the revised 
Pilot implementation date, the Pre-Pilot data collection period 
commenced on April 4, 2016.
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    \14\ See Approval Order at 27533 and 27545.
    \15\ See Securities Exchange Act Release No. 76382 (November 6, 
2015), 80 FR 70284 (November 13, 2015) (File No. 4-657).
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    On December 9, 2015, FINRA, on behalf of the Plan Participants, 
submitted an exemptive request to the Commission, seeking an exemption 
from certain data collection and reporting requirements set forth in 
the Plan.\16\ On February 17, 2016, the Commission granted Participants 
exemptive relief from complying with certain data collection and 
reporting requirements in the Plan.\17\ On March 23, 2016, the Exchange 
filed with the Commission a proposed rule change to adopt Rule 4770 to 
implement the data collection requirements of the Plan, which was 
effective on April 4, 2016.\18\
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    \16\ See Letter from Marcia E. Asquith, Senior Vice President 
and Corporate Secretary, FINRA, to Robert W. Errett, Deputy 
Secretary, Commission, dated December 9, 2015 (``Exemptive 
Request'').
    \17\ See Letter from David S. Shillman, Associate Director, 
Division of Trading and Markets, Commission, to Marcia E. Asquith, 
Senior Vice President and Corporate Secretary, FINRA, dated February 
17, 2016.
    \18\ See Securities Exchange Act Release No. 77456 (March 28, 
2016), 81 FR 18925 (April 1, 2016) (SR-NASDAQ-2016-023) [sic].
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    The Exchange now proposes to further amend Rule 4770 to modify 
additional data collection and reporting requirements.\19\ First, 
Appendix B.I.a(21) through B.I.a(27) currently requires that Trading 
Centers report the cumulative number of shares of cancelled orders 
during a specified duration of time after receipt of the order that was 
cancelled. The Exchange and the other Participants believe that, for 
purposes of reporting cancelled orders, it is appropriate to categorize 
unexecuted Immediate or Cancel orders separately as one bucket 
irrespective of the duration of time after order receipt, i.e., without 
a time increment, to better differentiate orders cancelled subsequent 
to entry from those where the customer's intent prior to order entry 
was to cancel the order if no execution could be immediately obtained. 
The Exchange, therefore, proposes to modify Commentary .04 to provide 
that unexecuted Immediate or Cancel orders shall be categorized 
separately for purposes of Appendix B.I.a(21) through B.I.a(27).
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    \19\ In connection with this proposed rule change and others 
made by Participants, FINRA intends to file an exemptive request on 
behalf of Participants seeking relief from certain of the Plan's 
data collection requirements.
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    The second change relates to the reporting of daily market quality 
statistics pursuant to Appendix B.I. Currently, Appendix B.I sets forth 
categories of orders, including market orders, marketable limit orders, 
and inside-the-quote resting limit orders, for which daily market 
quality statistics must be reported. The Exchange and the other 
Participants have determined that it is appropriate to include an order 
type for limit orders priced more than $0.10 away from the NBBO for 
purposes of Appendix B reporting. The Exchange therefore proposes to 
amend Commentary .06 to provide that limit orders priced more than 
$0.10 away from the NBBO shall be included as an order type for 
purposes of Appendix B reporting, and shall be assigned the number 
(22). These orders are not currently required to be reported pursuant 
to Appendix B, and the Exchange and the other Participants believe that 
requiring the reporting of such orders will produce a more 
comprehensive data set.
    The third change relates to the reporting of market quality 
statistics pursuant to Appendix B.I for a variety of order types, 
including inside-the-quote resting limit orders (12), at-the-quote 
resting limit orders (13), and near-the-quote resting limit orders 
(within $0.10 of the NBBO) (14). The Exchange and the other 
Participants believe that it is appropriate to require Trading Centers 
to report all orders that fall within these categories, and not just 
those orders that are ``resting.'' The Exchange, therefore, proposes to 
amend Commentary .06 to make this change.
    In the fourth change, the Exchange proposes to add new Commentary 
.09 to modify the manner in which market maker participation statistics 
are calculated. Currently, Appendix B.IV provides that market maker 
participation statistics shall be calculated based on share 
participation, trade participation, cross-quote share (trade) 
participation, inside-the-quote share (trade) participation, at-the-
quote share (trade) participation, and outside-the-quote share (trade) 
participation. The Exchange and the other Participants have determined 
that it is appropriate to add the count of the number of Market Makers 
used in the calculation of share (trade) participation to each 
category. The Exchange is therefore proposing this change as part of 
Commentary .09. In addition, Appendix B.IV(b) and (c) currently require 
that, when aggregating across Market Makers, share participation and 
trade participation shall be calculated using the share-weighted 
average and trade-weighted average, respectively. The Exchange and the 
other Participants believe that it is more appropriate to calculate 
share and trade participation by providing the total count of shares or 
trades, as applicable, rather than weighted averages, and the Exchange 
is therefore proposing this change as part of Commentary .09.
    The fifth change relates to the NBBO that a Trading Center is 
required to use when performing certain quote-related calculations. 
When calculating cross-quote share (trade) participation pursuant to 
Appendix B.IV(d) and inside-the-quote share (trade) participation 
pursuant to Appendix B.IV(e), the Plan requires the Trading Center to 
utilize the NBBO at the time of the trade for both share and trade 
participation calculations. When calculating at-the-quote share (trade) 
participation and outside-the quote share (trade) participation 
pursuant to Appendix B.IV(f) and (g), the Plan allows the Trading 
Center to utilize the NBBO at the time of or immediately before the 
trade for both share and trade participation calculations. The Exchange 
and the other Participants believe that it is appropriate to calculate 
all quote participation (cross-quote share (trade) participation, 
inside-the-quote share (trade) participation, at-the-quote share 
(trade) participation and outside-the-quote share (trade) 
participation) solely by reference to the

[[Page 63817]]

NBBO in effect immediately prior to the trade. The Exchange, therefore, 
proposes to make this change as part of Commentary .09.
    Finally, the Exchange proposes to change the end date until which 
the Pre-Pilot Data Collection Securities shall be used to fulfill the 
Plan's data collection requirements. Currently, Commentary .10 provides 
that Pre-Pilot Data Collection Securities are the securities designated 
by the Participants for purposes of the data collection requirements 
described in Items I, II and IV of Appendix B and Item I of Appendix C 
to the Plan for the period beginning six months prior to the Pilot 
Period and ending on the trading day immediately preceding the Pilot 
Period. The Exchange and the other Participants believe that it is 
appropriate to use the Pilot Securities to satisfy the Plan's data 
collection requirements prior to the commencement of the Pilot. 
Accordingly, the Exchange is revising Commentary .10 (which will be re-
numbered as Commentary .11) to provide that the Pre-Pilot Data 
Collection Securities shall be used to satisfy the Plan's data 
collection requirements through thirty-one days prior to the Pilot 
Period, after which time the Pilot Securities shall be used for 
purposes of the data collection requirements.\20\ As noted in Item 2 of 
this filing, the Exchange has filed the proposed rule change for 
immediate effectiveness. The Exchange has requested that the SEC waive 
the 30-day operative period so that the proposed rule change can become 
operative on August 30, 2016.
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    \20\ After regular trading hours on September 2, 2016, the 
national securities exchanges will establish which securities will 
be included as Pilot Securities for purposes of the Plan. The 
Exchange and the other Participants have determined that members 
should use the Pilot Securities list for data collection purposes 
once it becomes available. Thus, the proposed rule change requires 
that, beginning thirty days prior to the first day of the Pilot 
Period--i.e., September 3, 2016--The Exchange and Exchange members 
will comply with the data collection obligations of the Plan by 
collecting data on the Pilot Securities. As a result, beginning on 
September 3, 2016, members must migrate from using the Exchange's 
published Pre-Pilot Data Collection Security list and begin using 
the Pilot Securities list. September 2, 2016 will be the last day 
that members use the Pre-Pilot Data Collection Security list.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\21\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\22\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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 Section 6(b)(8) of the Act,\23\ which requires that the 
Exchange not impose any burden on competition that is not necessary or 
appropriate.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ 15 U.S.C. 78f(b)(8).
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    The Exchange believes that this proposal is consistent with the Act 
because it implements and clarifies the provisions of the Plan, and is 
designed to assist the Exchange in meeting its regulatory obligations 
pursuant to the Plan. In approving the Plan, the SEC noted that the 
Pilot was an appropriate, data-driven test that was designed to 
evaluate the impact of a wider tick size on trading, liquidity, and the 
market quality of securities of smaller capitalization companies, and 
was therefore in furtherance of the purposes of the Act. The Exchange 
believes that this proposal is in furtherance of the objectives of the 
Plan, as identified by the SEC, and is therefore consistent with the 
Act because the proposal implements and clarifies the requirements of 
the Plan.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange notes that the 
proposed rule change implements the provisions of the Plan, and is 
designed to assist the Exchange in meeting its regulatory obligations 
pursuant to the Plan. The Exchange also notes that, other than the 
change to require use of the Pilot Securities beginning thirty days 
prior to the beginning of the Pilot Period, the proposed changes will 
not affect the data collection and reporting requirements for members 
that operate Trading Centers; the proposed changes will only affect how 
the Exchange and Participants that operate Trading Centers collect and 
report data. The Exchange notes that, with respect to the change to 
require the use of the Pilot Securities beginning thirty days prior to 
the start of the Pilot Period, the proposed change reduces the number 
of securities on which affected members otherwise would have been 
required to collect data pursuant to the Plan and Rule 4770. In 
addition, the proposed rule change applies equally to all similarly 
situated members. Therefore, 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.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \24\ and Rule 19b-4(f)(6) \25\ thereunder 
because the proposal does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; and (iii) by its terms, 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.
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \26\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\27\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that so that the 
proposed rule change can become operative on August 30, 2016.
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    \26\ 17 CFR 240.19b-4(f)(6).
    \27\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow the Exchange to implement the proposed rules 
immediately thereby preventing delays in the implementation of the 
Plan. The Commission notes that the Plan is scheduled to start on 
October 3, 2016. Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change to be operative 
upon filing with the Commission.\28\
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    \28\ For purposes only of waiving the operative delay for this 
proposal, 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

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action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\29\
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    \29\ 15 U.S.C. 78s(b)(3)(C).
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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 Number SR-NASDAQ-2016-123 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-2016-123. 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 
a.m. and 3 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-2016-123 and should 
be submitted on or before October 7, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22255 Filed 9-15-16; 8:45 am]
BILLING CODE 8011-01-P