[Federal Register Volume 84, Number 93 (Tuesday, May 14, 2019)]
[Notices]
[Pages 21384-21387]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09871]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85806; File No. SR-NASDAQ-2019-035]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Remove the Exchange's Current Primary Contingency Procedure From the
Exchange's Rule Book
May 8, 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 April 26, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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 remove the Exchange's current Primary
Contingency Procedure from the Exchange's rule book and designate the
Exchange's current Secondary Contingency Procedure as the default
contingency procedure when a disruption occurs that prevents the
execution of the closing cross for a security.
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 currently has two contingency plans for determining the
Nasdaq Official Closing Price (``NOCP'') for a security in the event
that Nasdaq experiences a system disruption that precludes normal
execution of the Nasdaq closing cross pursuant to Rule 4754. In the
event of such disruption, the President of Nasdaq or any Senior
Executive designated by the President will be authorized to invoke
either the Primary Contingency Procedures set forth in Rule 4754(b)(7)
or the Secondary Contingency Procedures set forth in Rule 4754(b)(8) to
determine the NOCP, which would be published to the Consolidated Quote/
Consolidated Tape Plan (``SIPs''). Nasdaq will employ the Primary
Contingency Procedures if at all possible, and it will employ the
Secondary Contingency Procedures only if it determines that both the
standard procedures and the Primary Contingency Procedures are
unavailable.
Under the Primary Contingency Procedures, Nasdaq will employ an
offline process using stored order files to determine the size and
component executions for the closing cross trade in any and all
affected securities on a security-by-security basis and manually
deliver execution reports to members.\3\ Currently, Nasdaq maintains a
database of all closing cross orders entered into
[[Page 21385]]
its execution system, as well as other data regarding order processing.
The database is independent of and isolated from the execution system
and network and, as a result, it can operate regardless of impairment
to those systems. Nasdaq will operate the Primary Contingency
Procedures from a server that is also independent of and isolated from
the execution system and network, and that is supported by multiple
redundant backups.
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\3\ Currently, under Rule 4754(b)(7), when a disruption occurs
that prevents the execution of the closing cross for any security,
Nasdaq will identify the last regular way trade reported by the
network processor prior to 4:00 p.m. and will publish that price as
the NOCP. In the event an impacted security has no consolidated
trading in that security for that day, Nasdaq will have no NOCP and
no contingency cross for that security. Once Nasdaq has identified
the NOCP for a given security, Nasdaq will operate a modified
closing cross to determine the number of shares and the specific
orders that can be executed at the NOCP. All Market-on-Close
(``MOC'') orders entered prior to 3:55 p.m., Limit-on-Close
(``LOC'') orders entered prior to 3:58 p.m., and Imbalance Only
orders entered prior to 4:00 p.m. will be eligible to participate in
the Contingency Closing Cross. Nasdaq will cross and execute
eligible MOC and LOC orders in price-time priority. If an order
imbalance exists in the MOC and LOC interest that is marketable at
the NOCP, Nasdaq will include in the cross Imbalance Only orders on
the side of the market with less trading interest in price/time
priority, and then execute all MOC, LOC and Imbalance Only orders at
the NOCP. Once Nasdaq has completed the Contingency Closing Cross,
it will report the results to the appropriate network processor and
deliver execution reports to members. After hours trading will begin
either as scheduled at 4:00 p.m. or upon resolution of the
disruption that triggered Nasdaq to operate the Contingency Closing
Cross.
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In the event that Nasdaq's market is impaired and unable to execute
a closing auction for all or a subset of listed securities under the
standard closing procedures and the Primary Contingency Procedures are
unavailable, and Nasdaq determines to follow the Secondary Contingency
Procedures at or before 3 p.m. EST, Nasdaq will designate a back-up
exchange.\4\ Currently, Nasdaq has designated NYSE Arca as its official
back-up exchange.\5\ If Nasdaq determines to follow the Secondary
Contingency Procedures after 3 p.m., the Exchange would calculate the
NOCP with a volume-weighted average price (``VWAP'') calculation.\6\
Nasdaq would invoke the Secondary Contingency Procedures only after it
determines that neither the standard closing procedures nor the Primary
Contingency Procedures are available. Nasdaq is proposing to eliminate
the Primary Contingency Procedures so that the Secondary Contingency
Procedures will be the default contingency procedures.
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\4\ Currently, under Rule 4754(b)(8)(A), if Nasdaq determines to
invoke the Secondary Contingency Procedures at or prior to 3:00 p.m.
EST, the official closing price from Nasdaq's designated alternate
exchange would serve as the NOCP or, if there is no official closing
price on the designated alternate exchange, the NOCP would be the
VWAP of the consolidated last-sale eligible prices for the last five
minutes of trading during regular trading hours. If there were no
consolidated last-sale eligible trades in the last five minutes of
trading during regular trading hours, the NOCP would be the last
consolidated last-sale eligible trade for such security during
regular trading hours on that day or, if there was no last-sale
eligible trade, the prior day's NOCP. If no NOCP can be calculated
by any of the foregoing methods, the Exchange would not publish an
official closing price for the security.
\5\ See Securities Exchange Act Release No. 78014 (June 8,
2016), 81 FR 38755 (June 14, 2016) (SR-NASDAQ-2016-035) (``Notice of
Filing of Amendment No. 1, and Order Granting Accelerated Approval
of a Proposed Rule Change, as Modified by Amendment No. 1, To
Establish Secondary Contingency Procedures for the Exchange's
Closing Cross'').
\6\ Currently, under Rule 4754(b)(8)(B), if Nasdaq determines to
invoke the Secondary Contingency Procedures after 3:00 p.m. EST, the
VWAP of the consolidated last-sale eligible prices for the last five
minutes of trading during regular trading hours would serve as the
NOCP. If there were no consolidated last-sale eligible trades in the
last five minutes of trading during regular trading hours, the NOCP
would be the last consolidated last-sale eligible trade for such
security during regular trading hours on that day or, if there was
no last-sale eligible trade, the prior day's NOCP. If no NOCP can be
calculated by any of the foregoing methods, the Exchange would not
publish an official closing price for the security.
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Since June of 2002, Nasdaq has published contingency plans in the
event the Nasdaq closing process was to be disrupted during the annual
Russell US Index Reconstitution (``Russell Rebalance''). Nasdaq adopted
the current Primary Contingency Procedures in 2013 in order to formally
include the Exchange's contingency plans in its rule manual.\7\ In
response to evolving technology and industry practice, Nasdaq adopted
the Secondary Contingency Procedures in 2016.\8\ In conjunction with or
shortly after Nasdaq's adoption of the Secondary Contingency
procedures, NYSE,\9\ NYSE American,\10\ NYSE Arca,\11\ and Cboe BZX
Exchange, Inc. (``Cboe BZX'') \12\ established contingency procedures
materially similar to Nasdaq's Secondary Contingency Procedures.\13\
However, no other national securities exchange has established
contingency procedures similar to Nasdaq's Primary Contingency
Procedures.\14\ Further, the Primary Contingency Procedures have never
been invoked by the Exchange. Nasdaq is proposing to eliminate the
Primary Contingency Procedures so that the Secondary Contingency
Procedures will be the default contingency procedure.
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\7\ See Securities Exchange Act Release No. 69880 (June 27,
2013), 78 FR 40223 (July 3, 2013) (SR-NASDAQ-2013-090) (``Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Amend Exchange Rule 4754 Governing the NASDAQ Closing Cross
(``Cross'')'').
\8\ See supra, note 5.
\9\ See Securities Exchange Act Release No. 78015 (June 8,
2016), 81 FR 38747 (June 14, 2016) (SR-NYSE-2016-18) (``Notice of
Filings of Amendment No. 1, and Order Granting Accelerated Approval
of Proposed Rule Changes, as Modified by Amendment No. 1, To Provide
for How the Exchanges Would Determine an Official Closing Price if
the Exchanges Are Unable To Conduct a Closing Transaction'').
\10\ See Securities Exchange Act Release No. 78015 (June 8,
2016), 81 FR 38747 (June 14, 2016) (SR-NYSEMKT-2016-31) (``Notice of
Filings of Amendment No. 1, and Order Granting Accelerated Approval
of Proposed Rule Changes, as Modified by Amendment No. 1, To Provide
for How the Exchanges Would Determine an Official Closing Price if
the Exchanges Are Unable To Conduct a Closing Transaction'').
\11\ See Securities Exchange Act Release No. 78357 (July 19,
2016), 81 FR 48477 (July 25, 2016) (SR-NYSEArca-2016-94) (``Notice
of Filing and Immediate Effectiveness of Proposed Rule Change
Amending NYSE Arca Equities Rule 1.1 to Establish an Official
Closing Price for Exchange-Listed Securities if the Exchange is
Unable to Conduct a Closing Auction'').
\12\ See Securities Exchange Act Release No. 78527 (August 10,
2016), 81 FR 54628 (August 16, 2016) (SR-BatsBZX-2016-47) (``Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Establish a Closing Contingency Procedure'').
\13\ Investors Exchange LLC (``IEX'') has also adopted Secondary
Closing Auction Contingency Procedures under Rule 11.350(d)(4)(B)
that are similar to Nasdaq's Secondary Contingency Procedures.
\14\ IEX has adopted Primary Closing Auction Contingency
Procedures under Rule 11.350(d)(4)(A)(i). If IEX determines to
initiate the Primary Closing Auction Contingency Procedures, IEX
will publicly announce that no Closing Auction will occur. The price
of the Final Consolidated Last Sale Eligible Trade will be used for
the IEX Official Closing Price. The IEX Official Closing Price will
be published to the Consolidated Tape. IEX will execute orders on
the Closing Auction Book at the IEX Official Closing Price to the
extent executable buy and sell interest exists on the Closing
Auction Book. All remaining orders on the Order Book will be
canceled at the conclusion of the contingency process. IEX will
report the resulting execution to the Consolidated Tape and deliver
execution reports to Users. If a security's IEX Official Closing
Price cannot be determined by this subsection, IEX will not publish
an IEX Official Closing Price for the security and will cancel all
orders on the Order Book. The Post Market Session shall begin either
as scheduled, or upon resolution of the disruption that triggered
IEX to operate the Primary Contingency Procedures. In contrast, if
Nasdaq determines to initiate the Primary Contingency Procedures,
Nasdaq will identify the last consolidated regular way trade
reported by the network processor prior to 4:00 p.m. and shall
publish that price as the Nasdaq Official Closing Price for that
security. Once Nasdaq has identified the NOCP for a given security,
Nasdaq will operate a modified closing cross to determine the number
of shares and the specific orders that can be executed at the NOCP.
See supra, note 3.
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Nasdaq believes that removing the Primary Contingency Procedures
and utilizing the Secondary Contingency Procedures in the event Nasdaq
is unable to execute a closing cross would harmonize the Exchange's
contingency procedures with those of other national securities
exchanges, which would provide market participants with consistency and
predictability in the event that an exchange is impaired and cannot
conduct a closing auction. Furthermore, Nasdaq believes that the
Secondary Contingency Procedures best preserves Nasdaq's ability to
move quickly to establish a reliable closing price under unusual
conditions, as compared to the Primary Contingency Procedures, which
utilize an offline process that requires Nasdaq to determine the size
and component executions for the closing cross on a security-by-
security basis using stored order files and manually deliver execution
reports to members. The Exchange believes that having robust, efficient
contingency procedures is particularly important on high volume trading
days, such as the Russell Rebalance, which occurs annually in June.\15\
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\15\ See FTSE Russell, ``Russell US Index Reconstitution'',
available at: https://www.ftserussell.com/index-series/index-resources/russell-reconstitution.
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In addition, Nasdaq proposes to delete text in Rule 4754(b)(7)
describing the
[[Page 21386]]
information that the Exchange will use when determining whether to
employ the Primary or Secondary Contingency Procedures because the
Secondary Contingency Procedures will be the default contingency
procedure under the proposed rule change. The Exchange also proposes to
add ``VWAP'' as a defined term that was inadvertently omitted in the
previous version of Rule 4754(b)(8)(A)(ii); update Rule
4754(b)(8)(B)(i) to include the new defined term ``VWAP''; and add an
``or'' that was inadvertently omitted in the previous version of Rule
4754(b)(8)(B)(ii) and Rule 4754(b)(8)(B)(iii). Lastly, the Exchange
proposes renumbering the current Rule 4754(b)(8) as Rule 4754(b)(7) to
maintain a clear and organized rule structure.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\16\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\17\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. The proposal is consistent with this provision of the Act in
that it will ensure that the Exchange continues to operate a fair and
orderly market and to provide for an effective pricing mechanism for
the critical period of the market close in the event of a disruption
where Nasdaq is unable to execute a closing cross in a way that is
consistent with the contingency procedures utilized by other national
securities exchanges, which helps ensure transparency, consistency and
predictability for market participants. The Exchange believes that
having robust contingency procedures is particularly important on high
volume trading days, such as the Russell Rebalance, which occurs
annually in June.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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With respect to the Exchange's proposals to delete text in Rule
4754(b)(7) describing the information that the Exchange will use when
determining whether to employ the Primary or Secondary Contingency
Procedures; add ``VWAP'' as a defined term that was inadvertently
omitted in the previous version of Rule 4754(b)(8)(A)(ii); update Rule
4754(b)(8)(B)(i) to include the new defined term ``VWAP''; and add an
``or'' that was inadvertently omitted in the previous version of Rule
4754(b)(8)(B)(ii) and Rule 4754(b)(8)(B)(iii), the Exchange believes
that these changes are consistent with the Act because they will
improve the readability and clarity of the Rule. These changes are not
substantive. Lastly, the Exchange believes that its proposal to
renumber the current Rule 4754(b)(8) as Rule 4754(b)(7) is consistent
with the Act because it will allow the Exchange to maintain a clear and
organized rule structure and prevent investor confusion.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change is not
designed to address any competitive issues, but rather to provide for
how the Exchange would determine the NOCP for Exchange-listed
securities in the event that Nasdaq experiences a system disruption
that precludes normal execution of the Nasdaq closing cross. This is
designed to reduce the burden on competition by having similar back-up
procedures across other primary listing exchanges \18\ if such exchange
is impaired and cannot conduct a closing auction. This proposal will
maintain the Secondary Contingency Procedures, which were crafted with
input from industry participants, the Exchange, and the SIPs, and
remove the Primary Contingency Procedures, which are inconsistent with
industry practices.
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\18\ NYSE, NYSE American, NYSE Arca and Cboe BZX have
established contingency procedures materially similar to Nasdaq's
Secondary Contingency Procedures and do not have primary contingency
procedures. IEX has established a secondary contingency procedure
similar to Nasdaq's and a primary contingency procedure that differs
from Nasdaq's. See supra, notes 9 to 14.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 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 change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2019-035 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-2019-035. 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
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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-2019-035 and should be submitted on or before June 4, 2019.
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\21\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-09871 Filed 5-13-19; 8:45 am]
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