[Federal Register Volume 82, Number 45 (Thursday, March 9, 2017)]
[Notices]
[Pages 13168-13173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-04601]



[[Page 13168]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80149; File No. SR-NASDAQ-2016-161]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Instituting Proceedings 
To Determine Whether To Approve or Disapprove a Proposed Rule Change, 
as Modified by Amendment No. 1, To Adopt a New Extended Life Priority 
Order Attribute Under Rule 4703, and To Make Related Changes to Rules 
4702, 4752, 4753, 4754, and 4757

March 3, 2017

I. Introduction

    On November 17, 2016, the NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') 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\ a 
proposed rule change to adopt a new Extended Life Priority order 
(``ELO'') attribute for Designated Retail Orders under Nasdaq Rule 
(``Rule(s)'') 4703, and to make related changes to Rules 4702, 4752, 
4753, 4754, and 4757. The proposed rule change was published for 
comment in the Federal Register on December 5, 2016.\3\ On January 17, 
2017, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\5\ The Commission initially received seven comment letters on 
the proposed rule change.\6\ On February 17, 2017, the Exchange filed 
Amendment No. 1 to the proposed rule change \7\ and submitted a comment 
response letter.\8\ The Commission subsequently received one additional 
comment letter on the proposed rule change.\9\ The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change, as modified by Amendment No. 1, from interested persons 
and to institute proceedings pursuant to Section 19(b)(2)(B) of the Act 
\10\ to determine whether to approve or disapprove the proposed rule 
change, as modified by 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 No. 79428 (November 30, 
2016), 81 FR 87628 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79810, 82 FR 8244 
(January 24, 2017). The Commission designated March 5, 2017 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
    \6\ See Letters to Brent J. Fields, Secretary, Commission, from: 
Joseph Saluzzi and Sal Arnuk, Partners, Themis Trading LLC, dated 
December 19, 2016 (``Themis Letter''); Eric Swanson, EVP, General 
Counsel, and Secretary, Bats Global Markets, Inc., dated December 
22, 2016 (``BATS Letter''); Adam Nunes, Head of Business 
Development, Hudson River Trading LLC, dated December 22, 2016 
(``Hudson River Trading Letter''); Joanna Mallers, Secretary, FIA 
Principal Traders Group, dated December 23, 2016 (``FIA PTG 
Letter''); Adam C. Cooper, Senior Managing Director and Chief Legal 
Officer, Citadel Securities, dated December 27, 2016 (``Citadel 
Letter''); Andrew Stevens, General Counsel, IMC Financial Markets, 
dated December 28, 2016 (``IMC Letter''); and Venu Palaparthi, SVP, 
Compliance, Regulatory and Government Affairs, Virtu Financial LLC, 
dated February 9, 2017 (``Virtu Letter'').
    \7\ In Amendment No. 1, the Exchange: (i) Specified that the ELO 
attribute would be available during ``System Hours'' as defined in 
Rule 4701(g); (ii) clarified that any subsequent proposal to broaden 
the availability of the ELO attribute would be set forth in a 
distinct rule filing; (iii) provided additional details regarding 
the calculation of the 99% ELO eligibility requirement; (iv) 
proposed to assess members' compliance with ELO eligibility 
requirements on a monthly basis instead of a quarterly basis as 
initially proposed; (v) stated that, concurrently with the initial 
launch of the ELO attribute, it will implement new surveillances to 
identify any potential misuse of the ELO attribute; (vi) provided 
additional discussions regarding the availability of the ELO 
identifier on the Exchange's TotalView ITCH market data feed; (vii) 
provided additional details as to how the ELO attribute would 
operate with other order attributes and cross-specific order types; 
(viii) provided information regarding the Exchange's implementation 
of the ELO attribute; and (ix) provided additional justifications 
for proposing the ELO attribute. Amendment No. 1 has been placed in 
the public comment file for SR-NASDAQ-2016-161 at https://www.sec.gov/comments/sr-nasdaq-2016-161/nasdaq2016161-1589828-132168.pdf.
    \8\ See Letter to Brent J. Fields, Secretary, Commission, from 
T. Sean Bennett, Associate Vice President and Principal Associate 
General Counsel, Nasdaq, dated February 17, 2017 (``Nasdaq Response 
Letter'').
    \9\ See Letter to Brent J. Fields, Secretary, Commission, from 
John Ramsay, Chief Market Policy Officer, Investors Exchange LLC, 
dated March 2, 2017 (``IEX Letter'').
    \10\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange has proposed to offer a new ELO attribute, which would 
allow certain displayed retail orders to receive higher priority on the 
Nasdaq book than other orders at the same price, and to make conforming 
changes to its rules. As discussed in more detail below, the Exchange 
has proposed to amend Rule 4703 to set forth the ELO attribute in new 
subparagraph (m), add an Attachment B to its Designated Retail Order 
Attestation Form that sets forth an attestation that would be required 
of members in connection with utilizing the ELO attribute, and make 
related changes to Rules 4702(b), 4752, 4753, 4754, and 4757.

Proposed Rule 4703(m) and Attestation

    Proposed Rule 4703(m) states that ELO is an order attribute that 
allows an order to receive priority in the Nasdaq book above other 
orders resting on the Nasdaq book at the same price that are not 
designated with the ELO attribute.\11\ As proposed, the ELO attribute 
would be available only for displayed orders that qualify as Designated 
Retail Orders,\12\ and would be available during System Hours.\13\ A 
Designated Retail Order with the ELO attribute that is not marketable 
upon entry would be ranked on the Nasdaq book ahead of other displayed 
orders at the same price level that do not have the ELO attribute, but 
behind any other ELO orders at the same price level that the Exchange 
received previously.\14\
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    \11\ See also proposed changes to Rule 4757(a)(1)(B).
    \12\ See proposed Rule 4703(m). The term ``Designated Retail 
Order'' has the meaning set forth in Rule 7018. If a Designated 
Retail Order with a non-display attribute is also entered with the 
ELO attribute, the ELO attribute would be ignored and the order 
would be ranked on the Nasdaq book as a non-displayed order without 
Extended Life Priority. See id. The Exchange has stated that it 
anticipates extending the availability of the ELO functionality to 
all orders that meet the requirements of the ELO attribute. See 
Notice, 81 FR at 87630; see also Amendment No. 1. According to the 
Exchange, any such extension will be made through a separate filing 
with the Commission, and will likely require significant changes to 
the operation of the ELO attribute to account for the different 
participants eligible to use the attribute. See Amendment No. 1.
    \13\ See Amendment No. 1. See also Rule 4701(g) (defining 
``System Hours'' to mean the period of time beginning at 4:00 a.m. 
ET and ending at 8:00 p.m. ET (or such earlier time as may be 
designated by Nasdaq on a day when Nasdaq closes early)).
    \14\ See proposed Rule 4703(m); see also Notice, 81 FR at 87631.
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    As proposed, in order for an Exchange member to be eligible to use 
the ELO attribute, at least 99% of the Designated Retail Orders with 
the ELO attribute entered by the participant must exist unaltered on 
the Nasdaq book for a minimum of one second.\15\ Exchange members would 
be required to submit a signed written attestation, in a form 
prescribed by Nasdaq, that they will comply with these eligibility 
requirements.\16\
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    \15\ See proposed Rule 4703(m). The Exchange has stated that it 
will monitor the effectiveness of the one-second minimum resting 
time and the 99% threshold, and will propose to adjust these 
requirements, as needed, in a new rule filing. See Amendment No. 1.
    \16\ See proposed Rule 4703(m). The Exchange has proposed to 
amend its Designated Retail Order Attestation Form to add an 
Attachment B in order to require members to attest to compliance 
with the eligibility requirements for the ELO attribute, and to 
attest to their understanding of the penalties in cases of non-
compliance. See proposed changes to the Designated Retail Order 
Attestation Form, included as Exhibit 3 to Amendment No. 1. As 
proposed, the Designated Retail Order Attestation Form would also 
inform members that they can designate certain order entry ports as 
``Retail Extended Life Order Ports'' or tag each order as a ``Retail 
Extended Life Order.'' See id.

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[[Page 13169]]

    For purposes of determining compliance with the 99% threshold, the 
Exchange would measure the number of orders with the ELO attribute that 
rested for one second or longer and divide that value by the number of 
orders that the member marked with the ELO attribute.\17\ Moreover, the 
one second time frame would begin at the time the ELO order is entered 
into the Nasdaq book and would conclude once the order is removed from 
the Nasdaq book or modified by the participant or the Nasdaq 
system.\18\ As proposed, any change to an order that would currently 
result in the order losing priority (i.e., a change in the order's time 
stamp) would, if applied to an ELO order, be considered an alteration 
of the ELO order and stop the clock in terms of determining whether the 
order rested on the book unaltered for at least one second.\19\ In this 
vein, the Exchange stated that any type of update to an order that 
creates a new time stamp for priority purposes would count as a 
modification of the order and noted, by way of example, that each time 
an ELO order is updated due to pegging,\20\ re-pricing, or reserve 
replenishment, the one-second timer would restart.\21\ The Exchange 
also stated that full cancellations would stop the timer.\22\ By 
contrast, a sub-second full or partial execution of an ELO order 
resting on the Nasdaq book would not count as an order modification or 
cancellation for purposes of determining compliance with the ELO 
eligibility requirements.\23\ Likewise, a member's reduction of the 
size of a resting ELO order prior to one second elapsing also would not 
count as an alteration for purposes of determining compliance with the 
ELO eligibility requirements.\24\
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    \17\ See Amendment No. 1.
    \18\ See id. For an ELO order that Nasdaq routes upon receipt, 
the one second time frame would begin if and when the order returns 
to Nasdaq and is posted on the Nasdaq book. See id.
    \19\ See id.
    \20\ The Exchange illustrated through an example that each time 
an ELO order with a primary or market pegging attribute has its 
price updated, it would be considered a new order for purposes of 
determining its resting time. See id. According to the Exchange, 
each price update would be considered a separate order for 
determining compliance with the ELO eligibility requirements. See 
id.
    \21\ See id.
    \22\ See id.
    \23\ See proposed Rule 4703(m); see also Amendment No. 1. 
According to the Exchange, a sub-second partial execution of an ELO 
order would be in compliance with the ELO eligibility requirement of 
one second. See Amendment No. 1. In addition, a sub-second partial 
execution of an ELO order would not reset the time from which the 
one second time frame is measured for the remainder of the order. 
See id.
    \24\ See Amendment No. 1.
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    As noted above, only displayed Designated Retail Orders would be 
eligible for the ELO attribute, and if a Designated Retail Order with a 
non-display attribute is also entered with the ELO attribute, the order 
would be added to the Nasdaq book as a non-displayed order without 
Extended Life Priority.\25\ By way of example, the Exchange noted that 
an order with minimum quantity or midpoint pegging attributes would not 
be able to receive Extended Life Priority because an order with either 
of those attributes must be non-displayed.\26\ The Exchange also noted 
that a reserve order has a displayed portion and non-displayed portion, 
and the displayed portion of a reserve order with the ELO attribute 
would be eligible to receive Extended Life Priority while the non-
displayed portion of the order would not.\27\ If the displayed portion 
of such an order receives a full execution, the displayed quantity 
would be replenished from the non-displayed reserve quantity, the 
newly-replenished displayed size would receive a new time stamp and 
Extended Life Priority based on that time stamp, and a new timer would 
start for purposes of determining compliance with the one second 
requirement.\28\
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    \25\ See proposed Rule 4703(m); see also supra note 12.
    \26\ See Amendment No. 1.
    \27\ See id.
    \28\ See id.
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    As proposed, an order designated with the ELO attribute would only 
have Extended Life Priority if it is ranked at its displayed price. 
Specifically, proposed Rule 4703(m) would provide that an ELO order 
that is adjusted by the Exchange system upon entry to be displayed on 
the Nasdaq book at one price but ranked on the book at a different, 
non-displayed price would be ranked without the ELO attribute at the 
non-displayed price. If the Nasdaq system subsequently adjusts such an 
order to be displayed and ranked on the Nasdaq book at the same price, 
the order would be assigned Extended Life Priority and ranked on the 
book in time priority among other orders with Extended Life Priority at 
that price.\29\
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    \29\ See proposed Rule 4703(m).
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    Additionally, proposed Rule 4703(m) would provide that, for 
purposes of the Nasdaq Opening, Closing, and Halt Crosses, all ELO 
orders on the Nasdaq book upon initiation of a Cross may participate in 
such a Cross and retain priority among orders posted on the Nasdaq book 
that also participate in the Cross. Upon initiation of a Cross, all ELO 
orders on the Nasdaq book that are eligible to participate in a Cross 
would be processed in accordance with Rule 4752 (Opening Process), Rule 
4753 (Nasdaq Halt Cross), or Rule 4754 (Nasdaq Closing Cross), as 
applicable.\30\ ELO orders that are held by the Nasdaq system for 
participation in the Opening or Closing Cross would not have Extended 
Life Priority in the Cross,\31\ but would be assigned Extended Life 
Priority if the order joins the Nasdaq book upon completion of the 
Cross.\32\ Any orders with Extended Life Priority that are not executed 
in a Cross would be ranked on the Nasdaq book with Extended Life 
Priority.\33\
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    \30\ See id.
    \31\ According to the Exchange, cross-specific orders marked 
with the ELO attribute would be eligible to participate in the 
Nasdaq Opening, Halt, and Closing Crosses, but they would be ranked 
for purposes of a cross execution without the ELO attribute. See 
Notice, 81 FR at 87631. By contrast, orders with the ELO attribute 
that are ranked on the Nasdaq book (i.e., orders that are in the 
continuous market) would retain Extended Life Priority for purposes 
of a cross execution. See id. See also Amendment No. 1.
    \32\ See proposed Rule 4703(m).
    \33\ See id.
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    The Exchange has stated that it would carefully monitor members' 
use of the ELO attribute on a monthly basis and would not rely solely 
on a member's attestation with regard to ELO usage.\34\ The Exchange 
also has stated that it would determine whether a member was in 
compliance with the ELO eligibility requirements for a given month 
within five business days of the end of that month.\35\ A member that 
does not meet the ELO eligibility requirements for any given month 
would be ineligible to receive Extended Life Priority for its orders in 
the month immediately following the month in which it did not 
comply.\36\ Following the end of the ineligible month, a member would 
once again be able to enter ELO orders if it completes a new 
attestation.\37\ If a member fails to meet the ELO eligibility 
requirements for a second time, its orders would not be eligible for 
Extended Life Priority for the two months immediately following the 
month in which it did not meet the

[[Page 13170]]

eligibility requirements for the second time.\38\ If a member fails to 
meet the ELO eligibility requirements for a third time, it would no 
longer be eligible to receive Extended Life Priority for its 
orders.\39\ In addition, concurrently with the initial launch of the 
ELO attribute, the Exchange would implement new surveillance to 
identify any potential misuse of the ELO attribute.\40\ Moreover, any 
attempted manipulation or misrepresentation of the nature of an ELO 
order (e.g., representing a non-retail order to be a Designated Retail 
Order) would be a violation of Nasdaq's rules.\41\
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    \34\ See Amendment No. 1.
    \35\ See id.
    \36\ See id.; see also proposed new Attachment B to the 
Exchange's Designated Retail Order Attestation Form at Exhibit 3 to 
Amendment No. 1. Nasdaq has stated that its system would prevent a 
member that is not eligible to participate in the program from 
entering orders that are flagged with Extended Life Priority 
(including such designation on the port level). See Notice, 81 FR at 
87630 n.17.
    \37\ See Amendment No. 1; see also proposed new Attachment B to 
the Exchange's Designated Retail Order Attestation Form at Exhibit 3 
to Amendment No. 1.
    \38\ See Amendment No. 1; see also proposed new Attachment B to 
the Exchange's Designated Retail Order Attestation Form at Exhibit 3 
to Amendment No. 1.
    \39\ See Amendment No. 1; see also proposed new Attachment B to 
the Exchange's Designated Retail Order Attestation Form at Exhibit 3 
to Amendment No. 1.
    \40\ See Amendment No. 1.
    \41\ See id. According to Nasdaq, like the current surveillance 
it conducts, the new surveillance would identify potential violative 
conduct that would be investigated by Nasdaq and FINRA, and if the 
conduct is found to be violative, the offending member would be 
subject to disciplinary action. See Amendment No. 1 (citing the 
Nasdaq Rule 9000 Series).
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    The Exchange has proposed to designate orders with the ELO 
attribute with a new, unique identifier.\42\ Specifically, orders with 
the ELO attribute may be individually designated with the new 
identifier, or may be entered through an order port that has been set 
to designate, by default, all orders with the new identifier.\43\ 
Orders marked with the new identifier--whether on an order-by-order 
basis or via a designated port--would be disseminated via Nasdaq's 
TotalView ITCH data feed.\44\
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    \42\ See Notice, 81 FR at 87630-31; see also proposed new 
Attachment B to the Exchange's Designated Retail Order Attestation 
Form at Exhibit 3 to Amendment No. 1.
    \43\ See Notice, 81 FR at 87630-31; see also proposed new 
Attachment B to the Exchange's Designated Retail Order Attestation 
Form at Exhibit 3 to Amendment No. 1.
    \44\ See Notice, 81 FR at 87630-31. The Exchange is not 
proposing to disseminate the ELO identifier via the SIP data feeds. 
See Amendment No. 1.
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Additional Conforming Rule Changes

    In connection with the proposed addition of Rule 4703(m), the 
Exchange has proposed to make conforming changes to Rules 
4702(b)(1)(C), (b)(2)(C), and (b)(4)(C) to indicate that the ELO 
attribute may be assigned to price to comply, price to display, and 
post-only orders, respectively. In addition, the Exchange has proposed 
to amend Rules 4752 (Opening Process), 4753 (Nasdaq Halt Cross), and 
4754 (Nasdaq Closing Cross) to incorporate ELO orders into the cross 
execution priority hierarchies set forth in each of those rules.

Implementation

    The Exchange has stated that it plans to implement the ELO 
functionality for Designated Retail Orders in a measured manner.\45\ 
Specifically, the Exchange anticipates a rollout of the ELO 
functionality, beginning with a small set of symbols and gradually 
expanding further, and that it will publish the symbols that are 
eligible for the ELO attribute on its Web site.\46\ According to the 
Exchange, the exact implementation date would be reliant on several 
factors, such as the results of extensive testing and industry events 
and initiatives.\47\ The Exchange currently plans to implement the 
initial set of symbols for ELO in the third quarter of 2017.\48\
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    \45\ See Amendment No. 1.
    \46\ See id. The Exchange noted that, in symbols that are not 
eligible for ELO functionality, it will accept orders submitted with 
the ELO attribute as non-ELO orders. See id.
    \47\ See id.
    \48\ See id. The Exchange stated that it will notify market 
participants via an Equity Trader Alert once a specific date for the 
initial rollout is determined. See id. For a more detailed 
description of the proposed rule change, see Amendment No. 1.
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III. Summary of Comments and Nasdaq's Response

    The Commission received eight comment letters that expressed 
concerns with respect to the proposed rule change,\49\ and one response 
letter from the Exchange.\50\ Commenters' concerns are focused on: (1) 
The availability of the ELO attribute only to retail orders; (2) the 
eligibility requirements for the ELO attribute, including the 
effectiveness of the attestation requirement and the Exchange's methods 
for monitoring compliance and imposing discipline for non-compliance; 
(3) the potential market impact of the proposal; (4) the potential for 
information leakage from the identification of ELO orders in Nasdaq's 
market data feed; and (5) the potential conflict between the proposed 
ELO eligibility requirements and other activities of the member.
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    \49\ See supra notes 6 and 9. The IMC Letter broadly supported 
the comments articulated in the FIA PTG Letter and did not provide 
additional comments on the proposed rule change.
    \50\ See supra note 8.
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A. Availability of the ELO Attribute Only to Designated Retail Orders

    Three commenters expressed concern that the Exchange's proposal 
would provide the ELO functionality only to retail orders.\51\ One 
commenter argued that the proposal would effectively allow retail 
orders to cut in line in front of existing orders.\52\ Another 
commenter argued that the proposal would unfairly burden competition 
because it would allow the Exchange to compete for order flow by 
creating an order attribute that inappropriately favors certain market 
participants at the expense of others.\53\ These commenters also argued 
that the proposal is unnecessary, stating that there is insufficient 
evidence that retail investors are experiencing difficulty in obtaining 
fills for resting orders and therefore would benefit from the proposed 
functionality.\54\
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    \51\ See FIA PTG Letter at 3-4; Hudson River Trading Letter at 
2; Citadel Letter at 5-6. Three commenters also expressed general 
concerns with respect to the potential expansion of the ELO 
functionality beyond retail orders, or noted that their concerns 
regarding the enhanced priority provided to retail orders under the 
proposal could be exacerbated in connection with any such expansion. 
See BATS Letter at 1; Citadel Letter at 6; FIA PTG Letter at 6. In 
response to these concerns, the Exchange noted that any future 
expansion of the ELO functionality beyond retail orders would be 
subject to a separate rule filing with the Commission. See Nasdaq 
Response Letter at 7. See also Amendment No. 1.
    \52\ See FIA PTG Letter at 3-4. This commenter noted that most 
retail participants do not cancel orders within one second, Nasdaq 
would not be systematically enforcing the minimum order life 
requirement, and the decision whether to classify order flow as ELO 
would be made by brokers, not their retail customers. See id. at 3.
    \53\ See Citadel Letter at 4.
    \54\ See FIA PTG Letter at 2-3; Citadel Letter at 1-2.
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    In response to comments, the Exchange stated its belief that the 
growth in internalization and the speed of execution has required 
differentiation of retail orders, which are typically entered by long-
term investors, from those of other market participants.\55\ The 
Exchange also noted that the proposal is an effort to promote displayed 
orders with longer time horizons to enhance the market so that it works 
for a wider array of market participants, and the proposal will benefit 
publicly traded companies by promoting long-term investment in 
corporate securities.\56\ In addition, the Exchange noted that 
providing the proposed ELO functionality to retail investors would help 
improve execution quality and retail participation in on-exchange 
transactions, which would improve overall market quality on the 
Exchange.\57\ The Exchange also noted that the proposal would provide 
firms handling retail order flow with additional options to consider 
when determining the best way to represent and execute retail non-
marketable limit orders.\58\ According to the Exchange, the proposal 
may lead to improved

[[Page 13171]]

execution quality for not only retail orders, but also those orders 
that interact with retail orders.\59\
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    \55\ See Amendment No. 1.
    \56\ See Nasdaq Response Letter at 2.
    \57\ See Nasdaq Response Letter at 3 and 7.
    \58\ See id. at 3.
    \59\ See Amendment No. 1.
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B. Eligibility Requirements and Exchange Monitoring

    Four commenters expressed concern that the Exchange's initial 
proposal to monitor for compliance with the ELO eligibility 
requirements on a quarterly basis is insufficient to appropriately 
surveil for misuse of the functionality.\60\ Two of these commenters 
advocated for stronger or more immediate penalties for failure to 
comply with the ELO eligibility requirements.\61\ Specifically, one 
commenter stated that the Exchange should describe how it would monitor 
for and penalize abuse intra-quarter, and that the proposal does not 
impose strong enough penalties to deter abuse.\62\ The other commenter 
proposed that the Exchange conduct weekly reviews and that a 
participant be prohibited from utilizing the ELO functionality after 
only two weeks of non-compliance.\63\ In addition, one commenter 
suggested that the Exchange should systematically enforce the one 
second resting time for ELO orders,\64\ and one commenter suggested 
that the Exchange should code a one second minimum duration into the 
ELO attribute.\65\
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    \60\ See BATS Letter at 1-2; Citadel Letter at 4; Themis Letter 
at 2-3; Virtu Letter at 2.
    \61\ See BATS Letter at 2; Virtu Letter at 2.
    \62\ See BATS Letter at 2.
    \63\ See Virtu Letter at 2.
    \64\ See FIA PTG Letter at 5.
    \65\ See Themis Letter at 3.
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    Three commenters argued that, under the proposed attestation 
requirement, a participant could game the 99% threshold by improperly 
inflating its number of compliant ELO orders, such as by submitting a 
large number of non-marketable ELO Orders, while impermissibly 
benefiting from its non-compliant 1% of ELO Orders.\66\ One of these 
commenters also stated that the Exchange has not provided sufficient 
clarity regarding how it would calculate whether at least 99% of a 
member's ELO orders have rested unaltered on the Nasdaq book for a 
minimum of one second.\67\
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    \66\ See FIA PTG Letter at 4; Citadel Letter at 6; IEX Letter at 
2.
    \67\ See FIA PTG Letter at 4.
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    Moreover, two commenters expressed concern that the Exchange has 
not sufficiently limited the definition of ``Designated Retail Order'' 
for purposes of the proposed functionality to truly capture retail 
investors and to prevent misuse of the definition.\68\
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    \68\ See FIA PTG Letter at 4; Citadel Letter at 4-5.
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    In response, the Exchange amended its proposal, among other things, 
to add additional detail regarding the ELO functionality, including how 
the proposed one-second timer would operate and how the 99% threshold 
would be calculated, as well as to shorten the review period for 
determining compliance with the eligibility requirements from a 
quarterly review to a monthly review period.\69\ The Exchange also 
stated that it believes its proposed 99% threshold is appropriate, 
noting that the standard would require ``near perfect performance'' 
while allowing some flexibility in the event any unforeseen issues may 
result in de minimis non-compliance.\70\ Further, the Exchange stated 
that it would establish new surveillance to detect potential misuse of 
the proposed functionality and noted that any attempt to game or 
otherwise abuse the ELO functionality would be a violation of the 
Exchange's rules and would subject the member to potential disciplinary 
action.\71\
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    \69\ See Nasdaq Response Letter at 4 and Amendment No. 1. See 
also supra notes 17-24 and 34-39 and accompanying text. One 
commenter noted that this increased frequency of monitoring did not 
address its concerns with the Exchange's proposed monitoring and 
enforcement mechanisms. See IEX Letter at 3.
    \70\ See Nasdaq Response Letter at 4.
    \71\ See id. See also supra notes 40-41 and accompanying text. 
One commenter noted that the Exchange has not offered any specifics 
about this proposed new surveillance. See IEX Letter at 2. This 
commenter also noted that the proposed penalties for misuse of the 
ELO attribute would not address the problem that other market 
participants that traded with noncompliant ELO orders were doing so 
under false assumptions. See id. at 2-3.
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    Moreover, the Exchange stated that the definition of Designated 
Retail Order is clear that the member entering such an order must have 
policies and procedures designed to ensure that the order complies with 
the requirements of the definition, including that the order originate 
from a natural person.\72\ The Exchange also stated that the definition 
of Designated Retail Order allows for orders to originate from 
organizations in very limited circumstances.\73\ The Exchange noted 
that, accordingly, it does not believe that there is latitude for a 
member to legally represent itself as eligible to enter an order with 
ELO priority when the order does not fit within the definition of 
Designated Retail Order.\74\
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    \72\ See Nasdaq Response Letter at 6. See also Nasdaq Rule 7018 
(defining ``Designated Retail Order'').
    \73\ See Nasdaq Response Letter at 6.
    \74\ See id.
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C. Potential Market Impact

    Two commenters expressed concern that the proposal would create 
uncertainty regarding the priority of resting orders, and would 
negatively impact market liquidity and price discovery.\75\ According 
to these commenters, the increased uncertainty among liquidity 
providers would result in wider spreads, which would adversely impact 
long-term investors, including institutional and retail investors.\76\ 
One of these commenters also noted that the proposal would negatively 
impact market makers' hedging strategies in ETFs and their underlying 
securities, and the associated risk and cost would be borne by 
institutional and retail investors.\77\ Another commenter argued that 
ELO orders should not receive priority over other orders that have 
already been resting for at least one second, and that doing so would 
discourage other market participants from displaying liquidity.\78\
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    \75\ See Citadel Letter at 3-4; FIA PTG Letter at 5.
    \76\ See Citadel Letter at 3-4; FIA PTG Letter at 5.
    \77\ See Citadel Letter at 3.
    \78\ See Hudson River Trading Letter at 2-3.
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    In response, the Exchange noted its belief that markets and price 
discovery best function through the interactions of a diverse set of 
market participants.\79\ Moreover, the Exchange noted that providing a 
mechanism by which retail orders may have an increased chance of 
execution on the Exchange will promote competition among the Exchange, 
its exchange peers, and off-exchange trading venues.\80\ According to 
the Exchange, if the proposal does not ultimately improve market 
quality, market participants may send their orders elsewhere.\81\
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    \79\ See Amendment No. 1.
    \80\ See Nasdaq Response Letter at 7.
    \81\ See id. at 3 and Amendment No. 1. The Exchange stated that 
while Regulation NMS may dictate that the best displayed price must 
be accessed before executing at an inferior price, it does not 
dictate that an order must be displayed on Nasdaq. See Nasdaq 
Response Letter at 3.
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D. Potential for Information Leakage

    Four commenters expressed concern that the proposed ELO order 
identifier on Nasdaq's TotalView ITCH market data feed would cause 
information leakage by revealing to market participants that certain 
orders are retail orders and must remain unaltered for at least one 
second.\82\ Two of these commenters noted that, through the process of 
elimination, market participants also would be able to identify the 
preponderance of other quotes as coming from institutions or 
professional market makers.\83\ One of these commenters also contended, 
however, that not tagging ELO orders

[[Page 13172]]

would prevent liquidity providers from being able to identify their 
place in the queue, and that this uncertainty would lead to wider 
spreads and smaller order size.\84\
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    \82\ See Citadel Letter at 5; FIA PTG Letter at 5; Themis Letter 
at 1-2; IEX Letter at 1-2.
    \83\ See FIA PTG Letter at 5; IEX Letter at 1-2.
    \84\ See FIA PTG Letter at 5.
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    The Exchange acknowledged that information leakage is a concern for 
some non-retail market participants who may build or unwind significant 
trading positions or engage in proprietary and confidential trading 
strategies, and that it may be an issue if the ELO attribute were to be 
applied as currently proposed to non-retail market participant 
orders.\85\ The Exchange stated that it does not believe that 
information leakage is a concern with respect to the current proposal 
because the ELO functionality would be available only to retail orders, 
and retail investor interest is most often represented by one order at 
a single price.\86\ In addition, according to the Exchange, the 
identification of ELO orders in the Exchange's TotalView ITCH market 
data feed would provide transparency that would be valuable for the 
industry in evaluating the efficacy of the proposal.\87\
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    \85\ See Nasdaq Response Letter at 6.
    \86\ See id. at 6-7. One commenter noted that Nasdaq's response 
does not address the concern that the ELO identifier could help 
market participants identify institutional investor orders. See IEX 
Letter at 1-2.
    \87\ See Nasdaq Response Letter at 7.
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E. Potential Conflict With Other Activities of a Member

    One commenter suggested that the proposal could conflict with FINRA 
Rule 5320, commonly known as the Manning rule, which may require a 
broker-dealer to fill held customer orders in certain circumstances 
within one second of receiving the order.\88\ The commenter stated 
that, in this situation, the broker-dealer would have to cancel the 
customer's resting order on Nasdaq to prevent the customer from 
receiving a duplicative fill.\89\ According to the commenter, if this 
cancellation occurred within one second of the broker-dealer routing a 
customer ELO order to Nasdaq, the broker-dealer's efforts to comply 
with its FINRA Rule 5320 obligations would potentially render the 
broker-dealer out of compliance with the ELO requirements.\90\ The 
commenter further contended that it expects this scenario to occur 
frequently in very liquid stocks.\91\ In addition, the commenter 
asserted that, if a broker-dealer cannot meet the 99% threshold due to 
its FINRA Rule 5320 obligations, that broker-dealer's non-ELO customer 
limit orders would be disadvantaged as compared to other broker-
dealers' retail customer limit orders that could utilize the ELO 
attribute.\92\
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    \88\ See Citadel Letter at 2. FINRA Rule 5320(a) states that 
``[e]xcept as provided herein, a member that accepts and holds an 
order in an equity security from its own customer or a customer of 
another broker-dealer without immediately executing the order is 
prohibited from trading that security on the same side of the market 
for its own account at a price that would satisfy the customer 
order, unless it immediately thereafter executes the customer order 
up to the size and at the same or better price at which it traded 
for its own account.''
    \89\ See Citadel Letter at 2.
    \90\ See id.
    \91\ See id.
    \92\ See id.
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    This commenter also expressed concern that an Exchange member may 
receive a sub-second cancellation request from a customer, which could 
cause the member to fall under the 99% threshold and become ineligible 
to submit ELO orders on behalf of other customers.\93\
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    \93\ See id. at 5.
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    In response, the Exchange argued that the Manning obligations of a 
member using the ELO functionality would be no different from the 
obligations on an OTC market maker that internalizes orders and relies 
on the ``no-knowledge'' exception to separate its proprietary trading 
from its handling of customer orders.\94\ The Exchange stated that this 
exception should be equally applicable to a member using the ELO 
functionality.\95\
---------------------------------------------------------------------------

    \94\ See Nasdaq Response Letter at 5. See also Supplementary 
Material .02 to FINRA Rule 5320.
    \95\ See Nasdaq Response Letter at 5.
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    The Exchange also noted that it believes that retail investor limit 
orders that are posted on the Exchange will generally not be cancelled 
in a short period of time such as one second, because retail investors 
tend to have long-term investment goals and increasing the chance of 
receiving an execution is worth the risk of their order resting for one 
second or longer.\96\
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    \96\ See id. at 4.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2016-161, as Modified by Amendment No. 1, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \97\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of proceedings is appropriate at this time in 
view of the legal and policy issues raised by the proposal, as 
discussed below. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\98\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
discussed above, the Exchange has proposed to offer a new ELO 
attribute, which would only be available to Designated Retail Orders 
and would allow an order to receive priority in the Nasdaq book above 
other orders resting on the Nasdaq book at the same price that are not 
designated with the ELO attribute. The Commission is instituting 
proceedings to allow for additional analysis of, and input from 
commenters with respect to, the consistency of the proposed rule 
change, as modified by Amendment No. 1, with Section 6(b)(5) of the 
Act,\99\ which requires that the rules of a national securities 
exchange be designed, among other things, 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 not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers; and Section 6(b)(8) of the Act,\100\ which requires that the 
rules of a national securities exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \98\ Id.
    \99\ 15 U.S.C. 78f(b)(5).
    \100\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5), 6(b)(8), or any other provision of the Act, or the rules and 
regulations thereunder. Although there does not appear to be any issues 
relevant to approval or disapproval which would be facilitated by an 
oral presentation of data, views, and arguments, the Commission will

[[Page 13173]]

consider, pursuant to Rule 19b-4 under the Act,\101\ any request for an 
opportunity to make an oral presentation.\102\
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    \101\ 17 CFR 240.19b-4.
    \102\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by March 30, 2017. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by April 13, 2017. 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 No. SR-NASDAQ-2016-161 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 No. SR-NASDAQ-2016-161. The 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 No. SR-NASDAQ-2016-161 and 
should be submitted by March 30, 2017. Rebuttal comments should be 
submitted by April 13, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\103\
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    \103\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-04601 Filed 3-8-17; 8:45 am]
BILLING CODE 8011-01-P