[Federal Register Volume 81, Number 222 (Thursday, November 17, 2016)]
[Notices]
[Pages 81184-81186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27600]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79290; File Nos. SR-BX-2016-046; SR-NASDAQ-2016-111]


Self-Regulatory Organizations; NASDAQ BX, Inc.; The Nasdaq Stock 
Market LLC; Order Approving Proposed Rule Changes, as Modified by 
Amendments No. 1, Relating to Post-Only Orders and Orders With Midpoint 
Pegging

November 10, 2016.

I. Introduction

    On September 13, 2016, NASDAQ BX, Inc. (``BX'') and The Nasdaq 
Stock Market LLC (``Nasdaq'') (individually, an ``Exchange,'' and 
together, the ``Exchanges'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule changes relating to Post-Only Orders and 
Orders with Midpoint Pegging. The proposed rule changes were published 
for comment in the Federal Register on September 28, 2016.\3\ On 
October 5, 2016, Nasdaq filed Amendment No. 1 to its proposed rule 
change (``Nasdaq Amendment No. 1'') and on November 3, 2016, BX filed 
Amendment No. 1 to its proposed rule change (``BX Amendment No. 
1'').\4\ The Commission received one comment letter on Nasdaq's 
proposed rule change \5\ and a response letter from Nasdaq.\6\ The 
Commission is approving the Exchanges' proposals, as modified by their 
corresponding Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 78909 (September 
22, 2016), 81 FR 66708 (``BX Notice'') and 78908 (September 22, 
2016), 81 FR 66702 (``Nasdaq Notice'').
    \4\ In their respective Amendment No. 1, BX and Nasdaq modified 
the discussion of their respective proposal to reflect that, 
pursuant to proposed BX and Nasdaq Rules 4702(b)(4)(A), if the 
adjusted price of a Post-Only Order would lock or cross a non-
displayed price on the respective Exchange's Book, the Post-Only 
Order would be posted in the same manner as a Price to Comply Order. 
BX Amendment No. 1 is available at: https://www.sec.gov/comments/sr-bx-2016-046/bx2016046-1.pdf and Nasdaq Amendment No. 1 is available 
at: https://www.sec.gov/comments/sr-nasdaq-2016-111/nasdaq2016111-1.pdf. Because these amendments are technical in nature and do not 
materially alter the substance of the proposed rule changes, they 
are not subject to notice and comment.
    \5\ See Letter from Joseph Saluzzi and Sal Arnuk, Partners, 
Themis Trading LLC, to Brent J. Fields, Secretary, Commission, dated 
October 10, 2016 (``Themis Letter'').
    \6\ See Letter from Jeffrey S. Davis, Vice President and Deputy 
General Counsel, The NASDAQ Stock Market LLC, to Brent J. Fields, 
Secretary, Commission, dated November 8, 2016 (``Response Letter'').
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II. Description of the Proposed Rule Changes

    The Exchanges are proposing to amend the behavior of Post-Only 
Orders when they interact with resting Non-Displayed Orders, and the 
behavior of Orders with Midpoint Pegging in a crossed market. The 
Exchanges' proposals are substantively identical in many respects. 
Therefore, the description below describes the proposals jointly but 
notes material differences where applicable.\7\
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    \7\ For more details regarding the Exchanges' proposals, see 
Nasdaq Notice and BX Notice, supra note 3.
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    Currently, BX and Nasdaq Rules 4702(b)(4)(A) provide that, if the 
adjusted price \8\ of a Post-Only Order would lock or cross an Order on 
the respective Exchange's Book, the Post-Only Order would be repriced, 
ranked, and displayed at one minimum price increment below the current 
best-priced Order to sell on the respective Exchange's Book (for bids) 
or above the current best-priced Order to buy on the respective 
Exchange's Book (for offers). Under the proposals,\9\ if the adjusted 
price of the Post-Only Order would lock or cross a non-displayed price 
on the respective Exchange's Book, the Post-Only order would be posted 
in the same manner as a Price to Comply Order.\10\ However, the Post 
Only Order would execute:
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    \8\ According to BX and Nasdaq Rules 4702(b)(4)(A), if a Post-
Only Order would lock or cross a Protected Quotation, the price of 
the Order would first be adjusted. If the Order is Attributable, its 
adjusted price would be one minimum price increment lower than the 
current Best Offer (for bids) or higher than the current Best Bid 
(for offers). If the Order is not Attributable, its adjusted price 
would be equal to the current Best Offer (for bids) or the current 
Best Bid (for offers). However, the Order would not post or execute 
until the Order, as adjusted, is evaluated with respect to Orders on 
the respective Exchange's Book.
    \9\ The Exchanges are also proposing conforming changes 
throughout BX and Nasdaq Rules 4702(b)(4)(A) to reflect this change.
    \10\ According to BX and Nasdaq Rules 4702(b)(1)(A), if the 
entered limit price of a Price to Comply Order would lock or cross a 
Protected Quotation and the Price to Comply Order could not execute 
against an Order on the respective Exchange's Book at a price equal 
to or better than the price of the Protected Quotation, the Price to 
Comply Order will be displayed on the respective Exchange's Book at 
a price one minimum price increment lower than the current Best 
Offer (for a Price to Comply Order to buy) or higher than the 
current Best Bid (for a Price to Comply Order to sell), but will 
also be ranked on the respective Exchange's Book with a non-
displayed price equal to the current Best Offer (for a Price to 
Comply Order to buy) or the current Best Bid (for a Price to Comply 
Order to sell).
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     On Nasdaq if (i) it is priced below $1.00 and the value of 
price improvement associated with executing against an Order on the 
Nasdaq Book (as measured against the original limit price of the Order) 
equals or exceeds the sum of fees changed for such execution and the 
value of any rebate that would be provided if the Order posted to the 
Nasdaq Book and subsequently provided liquidity, or (ii) it is priced 
at $1.00 or more and the value of price improvement associated with 
executing against an Order on the Nasdaq Book (as measured against the 
original limit price of the Order) equals or exceeds $0.01 per share; 
\11\ and
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    \11\ This behavior related to the execution of the Post-Only 
Order is not changed by Nasdaq's proposal.
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     on BX, if (i) it is priced at $1.00 or more,\12\ or (ii) 
it is priced below $1.00 and the value of price improvement associated 
with executing against an Order on the Exchange Book (as measured 
against the original limit price of the Order) equals or exceeds the 
sum of fees charged for such execution and the value of any rebate that 
would be provided if the Order posted to the Exchange Book and 
subsequently provided liquidity.\13\
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    \12\ On BX, unlike on Nasdaq, executions in securities priced at 
or above $1 result in rebates for the accessor of liquidity and as 
such it is always in the best interest of the incoming Post-Only 
Order to execute in securities at or above $1.
    \13\ This behavior related to the execution of the Post-Only 
Order is not changed by BX's proposal.
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    Currently, BX and Nasdaq Rules 4702(b)(4)(A) also provide that, if 
the Post-Only Order would not lock or cross a Protected Quotation but 
would lock or cross an Order on the respective Exchange's Book, the 
Post Only Order

[[Page 81185]]

would be repriced, ranked, and displayed at one minimum price increment 
below the current best-priced Order to sell on the respective 
Exchange's Book (for bids) or above the current best-priced Order to 
buy on the respective Exchange's Book (for offers). Under the 
proposals,\14\ if the Post-Only Order would not lock or cross a 
Protected Quotation but would lock or cross a Non-Displayed Order on 
the respective Exchange's Book, the Post-Only Order would be posted, 
ranked, and displayed at its limit price.\15\ However, the Post Only 
Order would execute:
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    \14\ The Exchanges are also proposing conforming changes 
throughout BX and Nasdaq Rules 4702(b)(4)(A) to reflect this change.
    \15\ One effect of this proposal is that, when a Post-Only Order 
encounters a Non-Displayed Order that is a Midpoint Peg Order and 
posts at its limit price, the Post-Only Order would establish a new 
NBBO and the Midpoint Peg Order would either be cancelled or re-
adjusted based on the change to the NBBO.
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     On Nasdaq if (i) it is priced below $1.00 and the value of 
price improvement associated with executing against an Order on the 
Nasdaq Book equals or exceeds the sum of fees charged for such 
execution and the value of any rebate that would be provided if the 
Order posted to the Nasdaq Book and subsequently provided liquidity, or 
(ii) it is priced at $1.00 or more and the value of price improvement 
associated with executing against an Order on the Nasdaq Book equals or 
exceeds $0.01 per share; \16\ and
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    \16\ This behavior related to the execution of the Post-Only 
Order is not changed by Nasdaq's proposal.
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     on BX, if (i) it is priced at $1.00 or more,\17\ or (ii) 
it is priced below $1.00 and the value of price improvement associated 
with executing against an Order on the Exchange Book equals or exceeds 
the sum of fees charged for such execution and the value of any rebate 
that would be provided if the Order posted to the Exchange Book and 
subsequently provided liquidity.\18\
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    \17\ On BX, unlike on Nasdaq, executions in securities priced at 
or above $1 result in rebates for the accessor of liquidity and as 
such it is always in the best interest of the incoming Post-Only 
Order to execute in securities at or above $1.
    \18\ This behavior related to the execution of the Post-Only 
Order is not changed by BX's proposal.
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    Currently, Nasdaq Rule 4702(b)(5)(A) provides that, if the NBBO is 
crossed, a Midpoint Peg Post-Only Order \19\ would nevertheless be 
priced at the midpoint between the NBBO. Currently, BX and Nasdaq Rules 
4703(d) provide that, in the case of an Order with Midpoint 
Pegging,\20\ if the Inside Bid and Inside Offer are crossed, the Order 
would nevertheless be priced at the midpoint between the Inside Bid and 
the Inside Offer. Moreover, even if the Inside Bid and Inside Offer are 
crossed, an Order with Midpoint Pegging that crossed an Order on the 
respective Exchange's Book would execute. Under the proposed amendments 
to Nasdaq Rule 4702(b)(5)(A), if the NBBO is crossed, any existing 
Midpoint Peg Post-Only Order would be cancelled and any new Midpoint 
Peg Post-Only Order would be rejected. Similarly, under the proposed 
amendments to BX and Nasdaq Rules 4703(d), if the Inside Bid and Inside 
Offer are crossed, any existing Order with Midpoint Pegging would be 
rejected and any new Order with Midpoint Pegging would be cancelled.
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    \19\ According to Nasdaq Rule 4702(b)(5)(A), a Midpoint Peg 
Post-Only Order is an Order Type with a Non-Display Order Attribute 
that is priced at the midpoint between the NBBO and that would 
execute upon entry only in circumstances where economically 
beneficial to the party entering the Order.
    \20\ According to BX and Nasdaq Rules 4703(d), Midpoint Pegging 
means Pegging with reference to the midpoint between the Inside Bid 
and the Inside Offer. The price to which an Order is pegged is 
referred to as the Inside Quotation, Inside Bid, or Inside Offer, as 
appropriate.
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III. Summary of Comments and Response to Comments

    The Commission received a comment letter opposing Nasdaq's proposal 
and a response letter from Nasdaq.\21\
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    \21\ See supra notes 5 and 6.
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    Regarding Nasdaq's proposal, the commenter specifically questions 
whether allowing Post-Only Orders to lock Non-Displayed Orders would 
help or enhance price discovery.\22\ The commenter also questions 
whether allowing this locking behavior would undermine investors' 
reliance on the public market of bids, offers, and trades to reflect 
the true price of an asset.\23\ Moreover, the commenter questions the 
impact of this proposal on the ban against locked and crossed 
markets.\24\ Finally, the commenter questions whether allowing a non-
displayed locked market would maintain fair and orderly efficient 
markets, facilitate capital formation, and protect and serve the 
interests of investors.\25\
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    \22\ See Themis Letter at 3.
    \23\ See id.
    \24\ See id. at 4.
    \25\ See id. This commenter also urges the Commission to 
eliminate all post-only order types. See id. at 1. The Commission 
notes that the comment urging the elimination of all post-only 
orders types is beyond the scope of the proposals.
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    In response to these comments, Nasdaq states that its proposal to 
modify the processing of Post-Only Orders under a narrow set of 
conditions would ensure that the market operates as efficiently as 
possible, reduce information leakage, and improve execution 
quality.\26\ In addition, according to Nasdaq, posting Post-Only Orders 
at their limit price would result in tighter bid-ask spreads relative 
to the current re-pricing practice, and tighter spreads would reflect 
enhanced price discovery.\27\ Moreover, according to Nasdaq, many 
economists believe that a locked market is ``the truest reflection of 
the price of an asset.'' \28\ Therefore, Nasdaq believes that allowing 
buyers and sellers to reflect their true demand and supply prices, 
rather than re-pricing to an artificial price, would enhance investors' 
experience on Nasdaq.\29\ Nasdaq notes that the proposal does not 
permit a locked market as defined by Rule 610 of Regulation NMS, as 
Rule 610 defines a locked market as the display of bids and offers at 
the same price, while Nasdaq's proposal would involve only the display 
of a bid or an offer, but not both.\30\ Finally, Nasdaq states its 
belief that the proposal is consistent with maintaining fair and 
orderly markets, efficient capital formation, and the protection of 
investors.\31\ According to Nasdaq, the proposal would lead to tighter 
spreads, better execution prices, and lower information leakage for 
investors who currently quote and trade on Nasdaq.\32\ Nasdaq states 
that it anticipates that, as a result of the proposal, current members 
would quote and trade more actively and new members would commence 
quoting and trading, which would further enhance the quality of the 
Nasdaq market.\33\
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    \26\ See Response Letter at 1-2.
    \27\ See id. at 2.
    \28\ See id. at 3.
    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See id.
    \33\ See id.
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IV. Commission Findings

    After careful review, the Commission finds that the proposed rule 
changes, as modified by Amendments No. 1, are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\34\ In particular, the 
Commission finds that the proposed rule changes, as modified by 
Amendments No. 1, are consistent with Section 6(b)(5) of the Act,\35\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to

[[Page 81186]]

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.
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    \34\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \35\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchanges believe that the proposals 
related to the interaction between Post-Only Orders and Non-Displayed 
Orders would help to reduce the information leakage that can occur when 
a Post-Only Order re-prices to avoid locking or crossing the price of a 
Non-Displayed Order resting on the respective Exchange's book.\36\ 
Specifically, under the proposals, if a Post-Only Order would not lock 
or cross a Protected Quotation but would lock or cross a Non-Displayed 
Order on the respective Exchange's Book, the Post-Only Order would be 
posted, ranked, and displayed at its limit price, rather than be re-
priced. In addition, if the adjusted price of a Post-Only Order would 
lock or cross a non-displayed price on the respective Exchange's Book, 
the Post-Only Order would be posted in the same manner as a Price to 
Comply Order (i.e., displayed at a price one minimum price increment 
lower than the current Best Offer (for a buy order) or higher than the 
current Best Bid (for a sell order); ranked with a non-displayed price 
equal to the current Best Offer (for a buy order) or the current Best 
Bid (for a sell order)).
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    \36\ The Commission notes that, in conjunction with these 
proposals, the Exchanges are adopting the Trade Now instruction, 
which is an Order Attribute that would allow a resting Order that 
becomes locked by an incoming Displayed Order to execute against the 
available size of the contra-side locking Order as a liquidity 
taker. See Securities Exchange Act Release Nos. 79281 (November 10, 
2016) (SR-BX-2016-059) and 79282 (November 10, 2016) (SR-NASDAQ-
2016-156).
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    The Commission notes that the Exchanges' proposals to discontinue 
pricing and executing Midpoint Peg Post-Only Orders (Nasdaq only) and 
Orders with Midpoint Pegging when the NBBO is crossed would reflect 
that the midpoint of a crossed market is not a clear and accurate 
indication of a valid price and would avoid mispriced executions. The 
Commission also notes that this proposed behavior is similar to the 
rules of other exchanges.\37\
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    \37\ See, e.g., BatsBZX Rule 11.9(c)(9).
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    Based on the foregoing and the Exchanges' representations, the 
Commission believes that the proposed rule changes, as modified by 
Amendments No. 1, are consistent with the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule changes (SR-BX-2016-046 and SR-NASDAQ-
2016-111), as modified by their respective Amendment No. 1, be, and 
they hereby are, approved.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27600 Filed 11-16-16; 8:45 am]
 BILLING CODE 8011-01-P