[Federal Register Volume 84, Number 52 (Monday, March 18, 2019)]
[Notices]
[Pages 9848-9851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04945]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85292; File No. SR-NASDAQ-2019-010]]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Disseminate Abbreviated Order Imbalance Information Prior to 
Dissemination of the Order Imbalance Indicator

March 12, 2019.
    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 February 27, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to disseminate abbreviated order imbalance 
information prior to the dissemination of the Order Imbalance 
Indicator. The text of the proposed rule change is available on the 
Exchange's website 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 provides transparency into its Closing Cross auction via the 
``Order Imbalance Indicator'' (also known as the ``Net Order Imbalance 
Indicator'' or ``NOII''). The NOII is a message disseminated by 
electronic means containing information about MOC,\3\

[[Page 9849]]

LOC,\4\ IO,\5\ and Close Eligible Interest \6\ and the price at which 
those orders would execute at the time of dissemination.\7\ 
Specifically, the NOII consists of: (1) The ``Current Reference Price'' 
\8\; (2) the number of shares represented by MOC, LOC, and IO Orders 
that are paired at the Current Reference Price; (3) the size of any 
``Imbalance'' \9\; (4) the buy/sell direction of any Imbalance; and (5) 
indicative prices at which the Nasdaq Closing Cross would occur if it 
occurred at that time and the percent by which the indicative prices 
are outside the then current Nasdaq Market Center best bid or best 
offer, whichever is closer. The NOII is useful because it helps 
Participants to identify at what price and size the Closing Cross will 
commence, as well as number of shares required to offset any order 
imbalances to optimize an auction.
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    \3\ A ``Market on Close Order'' or ``MOC'' is an Order Type 
entered without a price that may be executed only during the Nasdaq 
Closing Cross. MOC Orders may be entered, cancelled, and/or modified 
between 4 a.m. ET and immediately prior to 3:55 p.m. ET. Between 
3:55 p.m. ET and immediately prior to 3:58 p.m. ET, an MOC Order can 
be cancelled and/or modified only if the Participant requests that 
Nasdaq correct a legitimate error in the Order. MOC Orders cannot be 
cancelled or modified at or after 3:58 p.m. ET for any reason. An 
MOC Order executes only at the price determined by the Nasdaq 
Closing Cross. See Rule 4702(b)(11).
    \4\ Pursuant to Rule 4702(b)(12), a ``Limit on Close Order'' or 
``LOC'' is an Order Type entered with a price that may be executed 
only in the Nasdaq Closing Cross, and only if the price determined 
by the Nasdaq Closing Cross is equal to or better than the price at 
which the LOC Order was entered. LOC Orders may be entered, 
cancelled, and/or modified between 4 a.m. ET and immediately prior 
to 3:55 p.m. ET. Between 3:55 p.m. ET and immediately prior to 3:58 
p.m. ET, an LOC Order may be entered provided that there is a 
``First Reference Price,'' i.e., the ``Current Reference Price'' 
(infra n.8 below) that Nasdaq disseminates in the first NOII at or 
after 3:55 p.m. ET. See Rule 4754(a)(9). Also between 3:55 p.m. ET 
and immediately prior to 3:58 p.m. ET, an LOC Order can be cancelled 
but not modified, and only if the Participant requests that Nasdaq 
correct a legitimate error in the Order. An LOC Order entered 
between 3:55 p.m. ET and immediately prior to 3:58 p.m. ET is 
accepted at its limit price, unless its limit price is higher 
(lower) than the First Reference Price for an LOC Order to buy 
(sell), in which case the LOC Order is handled consistent with the 
Participant's instruction that the LOC Order is to be: (1) Rejected; 
or (2) re-priced to the First Reference Price, provided that if the 
First Reference Price is not at a permissible minimum increment, the 
First Reference Price will be rounded (i) to the nearest permitted 
minimum increment (with midpoint prices being rounded up) if there 
is no imbalance, (ii) up if there is a buy imbalance, or (iii) down 
if there is a sell imbalance. The default configuration for 
Participants that do not specify otherwise is to have such LOC 
Orders re-priced rather than rejected.
    \5\ An ``Imbalance Only Order'' or ``IO'' is an Order entered 
with a price that may be executed only in the Nasdaq Closing Cross 
and only against MOC Orders or LOC Orders. IO Orders may be entered 
between 4:00 a.m. ET until the time of execution of the Nasdaq 
Closing Cross, but may not be cancelled or modified at or after 3:55 
p.m. ET. Between 3:55 p.m. ET and immediately prior to 3:58 p.m. ET, 
however, an IO Order can be cancelled and/or modified if the 
Participant requests that Nasdaq correct a legitimate error in the 
Order. IO Orders cannot be cancelled or modified at or after 3:58 
p.m. ET for any reason. See Rule 4702(b)(13).
    \6\ ``Close Eligible Interest'' means ``any quotation or any 
order that may be entered into the system and designated with a 
time-in-force of SDAY, SGTC, MDAY, MGTC, SHEX, or GTMC.'' Rule 
4754(a)(1).
    \7\ See Rule 4754(a)(7).
    \8\ Pursuant to Rule 4754(a)(7)(A), the ``Current Reference 
Price'' means the following: (i) The single price that is at or 
within the current Nasdaq Market Center best bid and offer at which 
the maximum number of shares of MOC, LOC, and IO orders can be 
paired; (ii) if more than one price exists under subparagraph (i), 
the Current Reference Price shall mean the price that minimizes any 
Imbalance; (iii) if more than one price exists under subparagraph 
(ii), the Current Reference Price shall mean the entered price at 
which shares will remain unexecuted in the cross; or (iv) if more 
than one price exists under subparagraph (iii), the Current 
Reference Price shall mean the price that minimizes the distance 
from the bid-ask midpoint of the inside quotation prevailing at the 
time of the order imbalance indicator dissemination.
    \9\ An ``Imbalance'' means the number of shares of buy or sell 
MOC, or LOC Orders that cannot be matched with other MOC or LOC, or 
IO Order shares at a particular price at any given time. See Rule 
4754(a)(2).
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    Prior to October 2018, Nasdaq disseminated the NOII beginning at 
3:50 p.m. ET, which was also the cutoff time (the ``Cutoff'') for 
entering MOC and certain LOC Orders into the Closing Cross, and it 
disseminated the NOII at five second intervals thereafter until market 
close. In October 2018, Nasdaq amended the Closing Cross process by 
moving both the Closing Cross Cutoff time and the commencement time of 
the NOII to 3:55 p.m. ET.\10\ Also in October, the Exchange also began 
disseminating the NOII in one second intervals until market close.\11\
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    \10\ See Securities Exchange Act Release No. 34-84454 (Oct. 19, 
2018), 83 FR 53923 (Oct. 25, 2018).
    \11\ See id.
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    When the Exchange proposed these changes to the timing of the NOII, 
it did so with the belief that ``continuing to disseminate the Order 
Imbalance Indicator starting at the Closing Cross Cutoff . . . will 
ensure that market participants receive a more complete picture of on 
close interest when such interest is relatively settled.'' \12\ The 
Exchange furthermore asserted that synching the NOII to the new Closing 
Cross Cutoff time was appropriate because the Closing Cross Cutoff ``is 
when the Exchange believes it is possible to disseminate meaningful 
information about the Nasdaq Closing Cross'' and ``any information 
disseminated before the Closing Cross Cutoff has the potential to be 
misleading to some market Participants'' (given that Participants may 
freely submit additional, cancel, or modify on close interest prior to 
the Cutoff and frequently do so immediately prior to the Cutoff).\13\
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    \12\ SR-NASDAQ-2018-068 Amendment No. 1, at 9 (filed Oct. 15, 
2018).
    \13\ Id. at 14.
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    Likewise, in proposing to increase the frequency of the NOII from 
five to one second intervals, the Exchange asserted that ``more 
frequent dissemination will be beneficial to market participants that 
use this information.'' \14\ Specifically, the Exchange noted that 
``the increased automation and efficiency in the equities markets that 
spurred the changed cutoff times . . . also justify increasing the 
frequency for disseminating information to the market.'' \15\
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    \14\ Id. at 10.
    \15\ Id. at 15.
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    Subsequent to October 2018, the Exchange has revisited its thinking 
regarding the utility and effect of an early dissemination of the NOII. 
The Exchange believes, based upon Participant feedback, that an early 
release of a subset of the NOII would be useful to Participants and 
improve price discovery in the Closing Cross.
    Specifically, Nasdaq believes that an early release of NOII data 
comprising the Current Reference Price, the number of paired shares, 
the imbalance size, and the imbalance direction would offer 
Participants additional time and flexibility to react to imbalance 
information in advance of the Closing Cross Cutoff and also aid them in 
making informed decisions about whether and how to participate in the 
Closing Cross. In other words, early dissemination of this data will 
help Participants to make educated decisions as to whether, how, and at 
what likely prices they may interact with paired and imbalanced 
shares--and do so at a point in time when their decisions do not 
present a risk of adverse consequences because the Participant's orders 
can still be freely modified or cancelled prior to the Closing Cross 
Cutoff time. For example, if Nasdaq was to release an early NOII 
indicating that a buy imbalance exists for a particular symbol, a 
Participant could act on that information in advance of the Closing 
Cross Cutoff to offset the imbalance, while also providing additional 
liquidity in the Closing Cross.
    However, the Exchange believes that an early release of the NOII 
should exclude indicative prices, including Near and Far Closing 
Prices. Because Participants may freely enter new orders or cancel or 
modify existing orders prior to the Closing Cross Cutoff, indicative 
prices may change dramatically during this time.\16\ The Exchange 
believes that early dissemination of indicative price information would 
be less useful during

[[Page 9850]]

the pre-Cutoff period than it is during the period between 3:55:00-
4:00:00, when Participants are restricted from entering, modifying, or 
canceling orders.
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    \16\ Unlike the Current Reference Price, which represents only 
the current price that maximizes the number of paired shares of on-
close orders slated to participate in the Closing Cross, the Near 
and Far Indicative Prices are likely to be more volatile prior to 
the Closing Cross Cutoff because they also account for orders that 
exist on the continuous book.
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    Likewise, Nasdaq believes that a second-by-second dissemination of 
NOII information prior to the Closing Cross Cutoff time would not be 
necessary or helpful, and that less frequent dissemination would 
suffice. Whereas after the Closing Cross Cutoff time, Participants face 
order restrictions and time pressures that render rapid refreshes of 
the NOII critical to guiding their decisions, such order restrictions 
and time pressures do not exist, or are less acute, prior to the 
Closing Cross Cutoff.
    Accordingly, Nasdaq now proposes to amend its Closing Cross 
procedures to provide for an early dissemination of a subset of NOII 
information at a lower frequency. Specifically, Nasdaq proposes to 
amend Rule 4754 to begin disseminating an ``Early Order Imbalance 
Indicator'' or ``EOII'' at 3:50 p.m. ET (or 10 minutes prior to the 
early closing time on a day when Nasdaq closes early).\17\ The Exchange 
proposes, in proposed Rule 4754(a)(10), that the EOII will consist of 
the same information as the full NOII (the Current Reference Price, the 
number of paired shares, the imbalance size, and the imbalance 
direction) except that it will not include the indicative price 
information set forth in Rule 4754(a)(7)(E), such as the Near Clearing 
Price or the Far Clearing Price. Unlike the full NOII, which 
disseminates in one second intervals, Nasdaq proposes to disseminate 
the EOII in 10 second intervals. At 3:55 p.m. ET or five minutes prior 
to the early closing time on a day when Nasdaq closes early, Nasdaq 
will cease disseminating the EOII and instead it will begin 
disseminating the full NOII at one second intervals, with the full 
complement of information forth in Rule 4754(a)(7).
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    \17\ On certain days during the calendar year, Nasdaq may close 
the market early, in accordance with Rules 4701(g) (defining the 
term ``Market Hours'' to mean 9:30 a.m. ET-4:00 p.m. ET ``or such 
earlier time as may be designated by Nasdaq on a day when Nasdaq 
closes early'') and 4617 (stating that the Nasdaq trading system 
operates from 4:00 a.m. to 8:00 p.m. Eastern. Time on each business 
day ``unless modified by Nasdaq''). In such instances, the Exchange 
proposes to disseminate the EOII beginning 10 minutes prior to the 
early market closing time. For example, if Nasdaq closes the market 
at 1 p.m. ET, Nasdaq would begin disseminating the EOII at 12:50 
p.m. ET and the NOII at 12:55 p.m. ET. The Exchange notes that it 
proposes to add clarifying language to Rule 4754(b) that addresses 
the possibility of early dissemination, not only of the EOII, but 
also of the NOII. The existing Rule does not specify that the NOII 
may disseminate earlier than 3:55 p.m. ET in the event of an early 
market close.
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    The Exchange notes that the New York Stock Exchange (``NYSE'') 
similarly disseminates limited imbalance information prior to its 3:45 
p.m. closing auction cutoff time.\18\
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    \18\ See NYSE Rule 123C(1)(b) (providing for the dissemination 
of an ``Informational Imbalance Publication'' between 3:00 p.m. and 
3:45 p.m. that ``indicates a disparity between MOC and marketable 
LOC interest to buy and MOC and marketable LOC interest to sell of 
any size in any security that is not a Mandatory MOC/LOC Imbalance 
Publication''), NYSE Rule 123C(1)(d) (providing for dissemination of 
a ``Mandatory MOC/LOC Imbalance Publication'' that ``indicates a 
disparity between MOC and marketable LOC interest to buy and MOC and 
marketable LOC interest to sell, measured at 3:45 p.m. . . .''), 
NYSE Rule 123C(5), and NYSE Rule 123C(6)(providing for the 
dissemination of imbalance information to Floor brokers between 2:00 
p.m. and 3:45 p.m.).
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    The Exchange proposes to implement this proposed rule change in Q2 
2019. The Exchange will announce the implementation date of the EOII in 
an Equity Trader Alert issued to Participants prior to implementing the 
change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\20\ 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.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    In particular, disseminating an EOII for the Nasdaq Closing Cross 
earlier than the Closing Cross Cutoff time will increase the 
transparency of the Closing Cross process and facilitate price 
discovery. That is, the Exchange will offer Participants more 
information about the Closing Cross than they currently receive and the 
Exchange will provide this information to Participants at a time when 
Participants have more flexibility to act on it than they do when the 
full NOII disseminates after the Closing Cross Cutoff time. 
Participants may use the information gleaned from the EOII to offset 
imbalances or to otherwise enter, cancel, or modify orders in advance 
of the Closing Cross.
    Moreover, Nasdaq believes it is in the best interests of 
Participants to exclude indicative pricing information from the EOII 
because the Near and Far Clearing Prices may change significantly prior 
to the Cutoff time as on close orders are added, cancelled, or 
modified. As noted above, the Near and Far Indicative Prices are more 
likely than the Current Reference Price to be volatile prior to the 
Closing Cross Cutoff because they account for orders that exist on the 
continuous book. Indicative prices may be misleading to Participants if 
provided at a time when additional order activity is apt to occur and 
closing interest remains unsettled.
    The Exchange believes that disseminating the EOII at 10 second 
intervals strikes the right balance between conveying material changes 
in imbalance information prior to the Closing Cross Cutoff time and 
avoiding excessive messaging traffic. As noted above, Participants do 
not require more frequent refreshes of EOII data given that, prior to 
the Closing Cross Cutoff time, they do not face the same order 
restrictions and time pressures that they do afterwards. The Exchange 
notes that the full NOII will continue to disseminate at one second 
intervals as of the Cutoff time.

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. Rather, the Exchange believes 
that the proposed rule change is evidence of the competitive forces in 
the equities markets insofar as the establishment of the EOII is 
designed to render the Nasdaq Closing Cross more transparent and more 
attractive to Participants, both in an absolute sense and relative to 
the NYSE, which publishes similar imbalance information prior to the 
cutoff time for its closing auction. The proposed EOII will be equally 
available to Participants.

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

[[Page 9851]]

19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and 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. 
The Exchange has satisfied this requirement.
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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 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-2019-010 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-2019-010. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2019-010 and should be submitted 
on or before April 8, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04945 Filed 3-15-19; 8:45 am]
 BILLING CODE 8011-01-P