[Federal Register Volume 81, Number 210 (Monday, October 31, 2016)]
[Notices]
[Pages 75471-75473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26138]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79155; File No. SR-NASDAQ-2016-143]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Add Commentary .14 to Rule 4770 (Compliance With Regulation NMS Plan To 
Implement a Tick Size Pilot)

October 25, 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 October 17, 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.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The text of the proposed rule change is set forth below. 
Proposed new language is in italics; deleted text is in brackets.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add Commentary .14 to Rule 4770 
(Compliance with Regulation NMS Plan to Implement a Tick Size Pilot) to 
provide the SEC with notice of its efforts to re-program its systems to 
eliminate a re-pricing functionality for certain orders in Test Group 
Three securities in connection with the Regulation NMS Plan to 
Implement a Tick Size Pilot Program (``Plan'' or ``Pilot'').\4\ Nasdaq 
also proposes to re-number current Commentary .12 relating to the Block 
Size exception to Commentary .13 as a technical correction.
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    \4\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').

* * * * *

The NASDAQ Stock Market Rules

* * * * *

4770. Compliance With Regulation NMS Plan To Implement a Tick Size 
Pilot

    (a) through (d) No Change.
    Commentary: .01-.12 No change.
    .1[2]3 For purposes of qualifying for the Block Size exception 
under paragraph (c)(3)(D)(iii) of this Rule, the Order must have a 
size of 5,000 shares or more and the resulting execution upon entry 
must have a size of 5,000 shares or more in aggregate.
    .14 Until October 31, 2016, the treatment of Price to Comply 
Orders, Price to Display Orders, Non-Displayed Orders, and Post-Only 
Orders that are entered through the OUCH or FLITE protocols in Test 
Group Three securities shall be as follows:
    Following entry, and if market conditions allow, a Price to 
Comply Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO until such time as 
the Price to Comply Order is able to be ranked and displayed at its 
original entered limit price.
    Following entry, and if market conditions allow, a Price to 
Display Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO until such time as 
the Price to Display Order is able to be ranked and displayed at its 
original entered limit price.
    Following entry, and if market conditions allow, a Non-Displayed 
Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO up (down) to the 
Order's limit price.
    Following entry, and if market conditions allow, the Post-Only 
Order in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO or the best price 
on the Nasdaq Book, as applicable until such time as the Post-Only 
Order is able to be ranked and displayed at its original entered 
limit price.
* * * * *

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 September 7, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change (``Proposal'') to 
adopt paragraph (d) and Commentary .12 to Exchange Rule 4770 to 
describe changes to system functionality necessary to implement the 
Plan. The Exchange also proposed amendments to Rule 4770(a) and (c) to 
clarify how the Trade-at exception may be satisfied. The SEC published 
the Proposal in the Federal Register for notice and comment on 
September 20, 2016.\5\ Nasdaq subsequently filed three Partial 
Amendments to clarify aspects of the Proposal. The Commission approved 
the Proposal, as amended, on October 7, 2016.\6\
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    \5\ See Securities Exchange Act Release No. 78837 (September 14, 
2016), 81 FR 64544 (September 20, 2016) (SR-NASDAQ-2016-126).
    \6\ See Securities Exchange Act Release No. 79075 (October 7, 
2016) (SR-NASDAQ-2016-126).
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    In SR-NASDAQ-2016-126, Nasdaq had initially proposed a re-pricing 
functionality for Price to Comply Orders, Non-Displayed Orders, and 
Post-Only Orders entered through the OUCH and FLITE protocols in Group 
Three securities.\7\ Nasdaq subsequently determined that it would not 
offer this re-pricing functionality for Price to Comply Orders, Non-
Displayed Orders, and Post-Only Orders entered through the OUCH and 
FLITE protocols in Group Three securities. As part of Partial Amendment 
No. 2 to SR-NASDAQ-2016-126, Nasdaq proposed to delete the relevant 
language from Rule 4770 related to this re-pricing functionality.
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    \7\ As originally proposed, Rule 4770(d)(2) stated that Price to 
Comply Orders in a Test Group Three Pilot Security will be adjusted 
repeatedly in accordance with changes to the NBBO until such time as 
the Price to Comply Order is able to be ranked and displayed at its 
original entered limit price. Rule 4770(d)(3) stated that, if market 
conditions allow, a Non-Displayed Order in a Test Group Three Pilot 
Security will be adjusted repeatedly in accordance with changes to 
the NBBO up (down) to the Order's limit price. Rule 4770(d)(4) 
stated that, if market conditions allow, the Post-Only Order in a 
Test Group Three Pilot Security will be adjusted repeatedly in 
accordance with changes to the NBBO or the best price on the Nasdaq 
Book, as applicable until such time as the Post-Only Order is able 
to be ranked and displayed at its original entered limit price.
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    In that amendment, Nasdaq noted that this change would only impact 
the treatment of Price to Comply Orders, Non-Displayed Orders, and 
Post-Only orders that are submitted through the

[[Page 75472]]

OUCH and FLITE protocols in Test Group Three Pilot Securities, as these 
types of Orders that are currently submitted to Nasdaq through the 
RASH, QIX or FIX protocols are already subject to this re-pricing 
functionality and will remain subject to this functionality under the 
Pilot.
    In the Amendment, Nasdaq further noted that its systems are 
currently programmed so that Price to Comply Orders, Non-Displayed 
Orders and Post-Only Orders entered through the OUCH and FLITE 
protocols in Test Group Three Securities may be adjusted repeatedly to 
reflect changes to the NBBO and/or the best price on the Nasdaq book. 
Nasdaq stated that it is re-programming its systems to remove this 
functionality for Price to Comply Orders, Non-Displayed Orders and 
Post-Only Orders entered through the OUCH and FLITE protocols in Test 
Group Three Securities.\8\ In the Amendment, Nasdaq stated that it 
anticipated that this re-programming shall be completed no later than 
November 30, 2016. If it appears that this functionality will remain 
operational by October 17, 2016, Nasdaq indicated that it would file a 
proposed rule change with the SEC and will provide notice to market 
participants sufficiently in advance of that date to provide effective 
notice. The rule change and the notice to market participants will 
describe the current operation of the Nasdaq systems in this regard, 
and the timing related to the re-programming.
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    \8\ Nasdaq has become aware that this re-pricing functionality 
also applies to Price to Display Orders that are entered through the 
OUCH and FLITE protocols in Test Group Three Securities, and is 
including those Orders as part of this proposal accordingly. Price 
to Display Orders will be treated in the same manner as Price to 
Comply Orders under the re-pricing functionality.
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    At this time, Nasdaq is still in the process of re-programming its 
systems to eliminate the re-pricing functionality in Test Group Three 
securities for Price to Comply Orders, Price to Display Orders, Non-
Displayed Orders, and Post-Only Orders that are entered through the 
OUCH or FLITE protocols. Nasdaq anticipates that this re-programming 
shall be complete on or before October 31, 2016.
    Therefore, the current treatment of Price to Comply Orders, Price 
to Display Orders, Non-Displayed Orders, and Post-Only Orders that are 
entered through the OUCH or FLITE protocols in Test Group Three 
securities shall be as follows:
    Following entry, and if market conditions allow, a Price to Comply 
Order in a Test Group Three Pilot Security will be adjusted repeatedly 
in accordance with changes to the NBBO until such time as the Price to 
Comply Order is able to be ranked and displayed at its original entered 
limit price.
    Following entry, and if market conditions allow, a Price to Display 
Order in a Test Group Three Pilot Security will be adjusted repeatedly 
in accordance with changes to the NBBO until such time as the Price to 
Display Order is able to be ranked and displayed at its original 
entered limit price.
    Following entry, and if market conditions allow, a Non-Displayed 
Order in a Test Group Three Pilot Security will be adjusted repeatedly 
in accordance with changes to the NBBO up (down) to the Order's limit 
price.
    Following entry, and if market conditions allow, a Post-Only Order 
in a Test Group Three Pilot Security will be adjusted repeatedly in 
accordance with changes to the NBBO or the best price on the Nasdaq 
Book, as applicable until such time as the Post-Only Order is able to 
be ranked and displayed at its original entered limit price.
    In addition to this proposal, Nasdaq will also issue an Equity 
Trader Alert that describes the current operation of the Nasdaq systems 
in this regard, and the timing related to the removal of this re-
pricing functionality.\9\
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    \9\ Nasdaq anticipates providing additional specificity to 
market participants as to the timing of the new functionality at a 
later date.
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    Nasdaq also proposes to re-number Commentary .12, which relates to 
the Block Size exception, to Commentary .13. A previous filing (SR-
NASDAQ-2016-123) added Commentary to Rule 4770 that resulted in 
Commentary .11, which addresses the effective date of the Rule, being 
re-numbered as Commentary .12. Nasdaq therefore proposes to re-number 
the Commentary .12 that addresses the Block Size exception as 
Commentary .13.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ 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. The purpose of this filing is to inform the SEC and market 
participants of the status of Nasdaq's attempts to re-program its 
systems to remove the re-pricing functionality in Test Group Three 
securities for Price to Comply Orders, Price to Display Orders, Non-
Displayed Orders, and Post-Only Orders that are entered through the 
OUCH or FLITE protocols, and the current treatment of such orders 
pending the removal of this functionality. This proposal is consistent 
with the Act because it provides the SEC and market participants with 
notice of Nasdaq's efforts in this regard, and is being submitted in 
connection with the statements made by Nasdaq in SR-NASDAQ-2016-126 in 
proposing the removal of this functionality.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Nasdaq also believes that the proposal is consistent with the Act 
because the re-pricing functionality will not significantly impact the 
data gathered pursuant to the Pilot. Nasdaq notes that this re-pricing 
functionality only affects Price to Comply Orders, Price to Display 
Orders, Non-Displayed Orders, and Post-Only Orders that are entered 
through the OUCH or FLITE protocols for Test Group Three securities 
until the re-pricing functionality is eliminated, and only becomes 
relevant when an Order in a Test Group Three security would cross a 
Protected Quotation of another market center. Nasdaq has analyzed data 
relating to the frequency with which Orders in Test Group Three 
securities are entered with a limit price that would cross a Protected 
Quotation of another market center, and believes that the re-pricing 
functionality will be triggered infrequently once Test Group Three 
becomes operational.\12\ The Exchange also notes that it is diligently 
working to re-program its systems to remove this re-pricing 
functionality, and that it anticipates this re-programming to be 
complete on or before October 31, 2016.
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    \12\ For example, on September 23, 2016, 0.3% of orders in Test 
Group Three securities were entered on Nasdaq at a price that 
crossed the NBBO. Nasdaq believes that this number will be even 
lower starting October 17, 2016, when the $0.05 tick increment for 
Test Group Three securities is in place.
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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 not necessary or appropriate in 
furtherance of the purposes of the Act. The purpose of this proposal is 
to provide the SEC and market participants with notice of Nasdaq's 
efforts to remove its re-pricing functionality in Test Group Three 
securities for Price to Comply Orders, Price to Display Orders, Non-
Displayed Orders, and Post-Only Orders that are entered through the 
OUCH or FLITE

[[Page 75473]]

protocols, consistent with its statements in SR-NASDAQ-2016-126.

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act\13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. Rule 
19b-4(f)(6)(iii), however, permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requests that the 
Commission waive the 30-day operative delay contained in Rule 19b-
4(f)(6)(iii) so that this proposed change will be in operative as of 
October 17, 2016, the date that Test Group Three securities begin to be 
subject to the quoting and trading restrictions of the Plan and, 
therefore, the relevant language in Rule 4770.
    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 Pilot started implementation on 
October 3, 2016, Test Group Three securities were phased into the Pilot 
starting on October 17, 2016, and waiving the 30-day operative delay 
would ensure that the rules of the Exchange would be in place during 
implementation. Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change to be operative 
upon filing with the Commission.\15\
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    \15\ 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 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.

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-2016-143 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-2016-143. 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-2016-143, and should 
be submitted on or before November 21, 2016.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Brent J. Fields,
Secretary.
[FR Doc. 2016-26138 Filed 10-28-16; 8:45 am]
 BILLING CODE 8011-01-P