[Federal Register Volume 81, Number 222 (Thursday, November 17, 2016)]
[Notices]
[Pages 81219-81221]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79282; File No. SR-NASDAQ-2016-156]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 4702 and Rule 4703 To Add a ``Trade Now'' Instruction to 
Certain Order Types

November 10, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 8, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Rule 4702 (Order Types) and Rule 
4703 (Order Attributes) to add a ``Trade Now'' instruction to certain 
order types.
    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
    Nasdaq proposes to amend Rules [sic] 4702 (Order Types) and Rule 
4703 (Order Attributes) to add a ``Trade Now'' instruction to certain 
order types. Nasdaq will offer this functionality through its OUCH, 
RASH, FLITE, and FIX protocols. This instruction will provide resting 
orders with a greater ability to receive an execution when that resting 
order is locked, e.g., the price of a resting non-display buy order 
equals the price of a resting displayed sell order on the Nasdaq book. 
The Trade Now instruction will allow participants to enter an 
instruction to have a locked resting buy (sell) order execute against 
the locking sell (buy) order. Depending on the protocol used by the 
participant to access the Nasdaq system, the participant may either 
specify that the order execute against locking interest automatically, 
or the participant may be required to send a Trade Now instruction to 
the Exchange once the order has become locked. As discussed in greater 
detail below, Nasdaq is offering the Trade Now instruction for all 
orders that may be sent to the continuous Nasdaq book, and will not 
offer the instruction for orders that do not execute on the continuous 
book.
    When a Trade Now instruction is applied to a resting buy (sell) 
order, the order will execute against the available size of the locking 
sell (buy) order at the locked price. The following example illustrates 
this scenario:
     Participant A enters a Non-Display buy order for 200 
shares at $10, and specifies the Trade Now instruction;
     Participant B enters a Post Only sell order for 100 shares 
at $10; \3\
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    \3\ The Exchange recently submitted a proposal to amend Nasdaq 
Rules 4702 and 4703 to change the way in which Post Only Orders 
interact with resting Non-Display orders and preventing the 
execution of midpoint pegged orders during a crossed market. See 
Securities Exchange Act Release No. 78908 (September 22, 2016), 81 
FR 66702 (September 28, 2016) (SR-NASDAQ-2016-111).
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     The Post Only order is posted at $10 and locks the Non-
Display order;
     The buy order will execute for 100 shares at $10 as the 
remover of liquidity.
    If a buy (sell) order with the Trade Now instruction is only 
partially executed, the unexecuted portion of that order remains on the 
Nasdaq book and maintains its priority. When a Trade Now instruction is 
entered through the OUCH or FLITE protocol for a resting buy (sell) 
order and there is no locking

[[Page 81220]]

order on the opposite side of the market, the Trade Now instruction 
will be ignored and the buy (sell) order will remain on the Nasdaq 
book, retaining its priority.
    As noted above, Nasdaq is proposing to offer the Trade Now 
instruction for all orders that may be sent to the continuous Nasdaq 
book (as opposed to the opening and closing book), and will not offer 
the instruction for orders that do not execute on the continuous book. 
Accordingly, the Trade Now instruction shall not be available for 
Supplemental Orders (Rule 4702(b)(6)), Market On Open Orders (Rule 
4702(b)(8)), Limit On Open Orders (Rule 4702(b)(9)), Opening Imbalance 
Only Orders (Rule 4702(b)(10)), Market On Close Orders (Rule 
4702(b)(11)), Limit on Close Orders (Rule 4702(b)(12)), and Imbalance 
Only Orders (Rule 4702(b)(13)). These order types are subject to other 
Nasdaq rules regarding the display and execution of those orders, and 
the use of the Trade Now instruction would be inconsistent with those 
other Nasdaq rules.\4\ Accordingly, Nasdaq is not offering the Trade 
Now instruction for those order types.
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    \4\ For example, 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). Rule 4757(a)(1)(D) provides that a 
Supplemental Order will be matched against an order only at the 
National Best Bid or Offer, and only if the size of the order is 
less than or equal to the aggregate size of Supplemental Order 
interest available at the price of the order. In addition, a 
Supplemental Order will not execute if the NBBO is locked or 
crossed. See Rule 4757(a)(1)(D). To the extent that a Supplemental 
Order will only be matched at the National Best Bid or Offer, and 
the Trade-Now instruction allows a locked resting order to execute 
at a price that is potentially better than the NBBO, the function of 
the Trade-Now instruction is inconsistent with the function of the 
Supplemental Order. Similarly, the purpose of the various Cross 
mechanisms is to establish a price that maximizes the number of 
applicable quotes and orders that may be executed. See, e.g., Rule 
4752(d)(2). Allowing an order to automatically execute against 
locking interest without regard to the price of other same-side 
interest is inconsistent with a process that establishes a price at 
which the maximum number of shares may be paired.
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    Depending on the interface being used by the participant, the Trade 
Now attribute may either allow the order to execute against locking 
interest automatically (``Reactive Trade Now''), or the participant may 
be required to send a Trade Now instruction to the Exchange once the 
order has become locked (``Non-Reactive Trade Now''). All orders that 
are entered through the RASH and FIX protocols with a Trade Now order 
attribute will be Reactive Trade Now, and those orders shall execute 
against locking interest automatically.
    The Reactive Trade Now instruction will be available on an order-
by-order basis, and will also be available as an optional port level 
setting. If the Reactive Trade Now setting is enabled on a specific 
port, all orders entered via the specific port will, by default, be 
designated with the Reactive Trade Now instruction. If the Reactive 
Trade Now setting is enabled on a specific port, participants will have 
the ability to designate on an order-by-order basis that a particular 
order entered via the specific port will not be designated with the 
Reactive Trade Now instruction, thereby overriding the port level 
setting for the order. If the Reactive Trade Now instruction is 
specified for an order for which the Trade Now instruction does not 
apply, e.g., a Supplemental Order or a Market On Open Order, the system 
will not invoke the Trade Now instruction for that order.
    In contrast, orders entered through the OUCH and FLITE protocols 
will use the Non-Reactive Trade Now functionality, and participants 
must send the Trade Now instruction after the order becomes locked. If 
a participant enters a Non-Reactive Trade Now instruction when there is 
no locking interest, the instruction will be ignored by the system and 
the order will remain on the Nasdaq Book with the same priority.
    The Non-Reactive Trade Now instruction will be available to 
participants on order-by-order basis. If the Non-Reactive Trade Now 
instruction is entered for an order for which the Trade Now instruction 
does not apply, the system will not invoke the Trade Now instruction 
for that order.
    Nasdaq is offering two different variations of the Trade Now 
instruction to reflect the differences in behavior among participants 
who use the different Nasdaq protocols. For example, Nasdaq typically 
assumes a more active role in managing the order flow submitted by 
users of the RASH and FIX protocols. Allowing these participants to use 
the Reactive Trade Now instruction at the time of order entry will 
allow for the automatic execution of orders, and reflects the order 
flow management practices of these participants. In contrast, users of 
the OUCH and FLITE protocols generally assume a more active role in 
managing their order flow. Offering the Non-Reactive Trade Now 
instruction for these protocols, and its requirement that the 
instruction must be sent after the order becomes locked, reflects the 
order flow management practices of these participants.
    Nasdaq notes that a similar functionality currently exists on NYSE 
Arca, Inc. (``NYSE Arca''), which NYSE Arca refers to as a ``Non-
Display Remove Modifier.'' As set forth in NYSE Arca Rule 7.31, a Limit 
Non-Displayed Order may be designated with a Non-Display Remove 
Modifier. If so designated, a Limit Non-Displayed Order to buy (sell) 
will trade as the liquidity-taking order with an incoming Adding 
Liquidity Only Order (``ALO Order'') to sell (buy) that has a working 
price equal to the working price of the Limit Non-Displayed Order.\5\ 
NYSE Arca also provides this functionality for other orders, such as 
Mid-Point Passive Liquidity Orders (``MPL Orders'') designated Day and 
MPL-ALO Orders \6\ and Arca Only Orders.\7\
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    \5\ See NYSE Arca Rule 7.31(d)(2)(B).
    \6\ See NYSE Arca Rule 7.31(d)(3)(G).
    \7\ See NYSE Arca Rule 7.31(e)(1)(C). To the extent that the 
Trade-Now functionality will be made available for Price to Comply 
Orders, Price to Display Orders, Non-Displayed Orders, Post-Only 
Orders, Midpoint Peg Post-Only Orders, and Market Maker Peg Orders, 
Nasdaq notes that the Trade-Now functionality will apply to 
different order types than the NYSE Arca Non-Display Remove Modifier 
functionality.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ 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, 
by offering participants an additional functionality that will 
facilitate the execution of locked orders, thereby increasing the 
efficient functioning of the Nasdaq market. The Trade Now functionality 
is an optional feature that is being offered at no additional charge, 
and is designed to reflect both the objectives of the Nasdaq market, 
and the order flow management practices of various market participants. 
For these reasons, the Trade Now functionality will only be made 
available for orders that are entered in the continuous Nasdaq book, 
and, depending on the protocol, will be offered as either the Reactive 
Trade Now or Non-Reactive Trade Now functionality.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. This is an optional 
functionality that is being

[[Page 81221]]

offered at no charge, and which may be used equally by similarly-
situated participants. Although the functionality of the Trade Now 
instruction will differ depending upon the protocol that is being used 
to access Nasdaq, Nasdaq believes that the difference in functionality 
reflects the different ways in which participants enter and manage 
their order flow.
    As noted above, Nasdaq will offer the Trade Now functionality 
through the OUCH, RASH, FLITE, and FIX protocols. Nasdaq will not offer 
the Trade Now functionality through the QIX protocol.\10\ Nasdaq notes 
that, although the QIX protocol can support the removing of liquidity, 
QIX is designed to provide two-sided quote messages to the trading 
system, unlike the OUCH, RASH, FLITE and FIX protocols, which are 
designed to facilitate order submission. Nasdaq also notes that QIX is 
an infrequently-used protocol,\11\ and that this protocol cannot 
support the expansion of fields that adopting the Trade Now instruction 
would require. Nasdaq therefore believes that its decision to offer the 
Trade Now instruction through the OUCH, RASH, FLITE, and FIX protocols 
will not impose any burden on competition that is not necessary or 
appropriate.
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    \10\ Although participants may use other protocols, such as 
DROP, those protocols are not related to order entry, and so the 
Trade Now functionality is not being offered for those protocols.
    \11\ As of September 15, 2016, of the 5,090 customer ports for 
the various Nasdaq protocols, only 124 of those ports are QIX 
protocol.
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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) of the Act and Rule 19b-
4(f)(6) thereunder.\12\
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    \12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the 
Commission to 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 
the proposal may become operative immediately upon filing. The Exchange 
states that the Trade Now functionality is complementary to its recent 
proposal to change the way in which Post Only Orders interact with 
resting Non-Display orders.\15\ The Exchange believes that releasing 
both complementary functionalities at the same time will be easier for 
market participants to manage and implement. The Exchange further 
believes that the Trade Now functionality will facilitate the execution 
of locked orders, thereby increasing the efficient functioning of the 
Nasdaq market, and that waiver of the operative delay will allow this 
functionality to be made available at an earlier date. Finally, the 
Exchange notes that NYSE Arca currently utilizes a similar 
functionality in the form of its Non-Display Remove Modifier. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Therefore, the Commission hereby waives the operative delay and 
designates the proposed rule change operative upon filing.\16\
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ See supra note 3.
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
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 change 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-2016-156 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 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-156. 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 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-2016-156, and should 
be submitted on or before December 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Brent J. Fields,
Secretary.
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    \17\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-27592 Filed 11-16-16; 8:45 am]
 BILLING CODE 8011-01-P