[Federal Register Volume 84, Number 107 (Tuesday, June 4, 2019)]
[Notices]
[Pages 25844-25848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11545]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85954; File No. SR-NASDAQ-2019-044]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Allow an Odd Lot-Sized 
Order To Be Eligible for the Midpoint Extended Life Order

May 29, 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 May 20, 2019, The Nasdaq Stock Market LLC

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(``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 allow an odd lot-sized Order to be 
eligible for the Midpoint Extended Life Order. 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
    The Exchange is proposing to allow an odd lot \3\-sized Order \4\ 
to be eligible for the Midpoint Extended Life Order.\5\ The Midpoint 
Extended Life Order is an Order Type with a Non-Display Order Attribute 
that is priced at the midpoint between the NBBO and that will not be 
eligible to execute until the Holding Period of one half of a second 
has passed after acceptance of the Order by the System. Once a Midpoint 
Extended Life Order becomes eligible to execute, the Order may only 
execute against other eligible Midpoint Extended Life Orders. Nasdaq 
adopted the Midpoint Extended Life Order to address the needs of market 
participants that focus their trading on receiving midpoint execution 
where time to execution is less important when working to meet their 
long term investment needs. Since its implementation in 2018,\6\ the 
Midpoint Extended Life Order Type has achieved its design expectations. 
One metric that Nasdaq measures is the change in the NBBO after a 
Midpoint Extended Life Order executes. In the month of April 2019, the 
NBBO price was the same as it was prior to a Midpoint Extended Life 
Order execution approximately 88-90 percent of the time one second 
later. This shows that the executions are generally not impacting the 
overall market price. Furthermore, Nasdaq believes the sample size is 
robust as there are approximately 12.5 million shares transacted as 
Midpoint Extended Life Orders a day.
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    \3\ The terms ``normal unit of trading'' or ``round lot'' means 
[sic] the size generally employed by traders when trading a 
particular security, which is 100 shares in most instances. The term 
``odd lot'' means a size of less than one normal unit of trading. 
See Rule 4703(b).
    \4\ The term ``Order'' means an instruction to trade a specified 
number of shares in a specified System Security submitted to the 
Nasdaq Market Center by a Participant. An ``Order Type'' is a 
standardized set of instructions associated with an Order that 
define how it will behave with respect to pricing, execution, and/or 
posting to the Nasdaq Book when submitted to Nasdaq. An ``Order 
Attribute'' is a further set of variable instructions that may be 
associated with an Order to further define how it will behave with 
respect to pricing, execution, and/or posting to the Nasdaq Book 
when submitted to Nasdaq. The available Order Types and Order 
Attributes, and the Order Attributes that may be associated with 
particular Order Types, are described in Rules 4702 and 4703. One or 
more Order Attributes may be assigned to a single Order; provided, 
however, that if the use of multiple Order Attributes would provide 
contradictory instructions to an Order, the System will reject the 
Order or remove non-conforming Order Attributes. See Rule 4701(e).
    \5\ See Rule 4702(b)(14).
    \6\ See Securities Exchange Act Release No. 82825 (March 7, 
2018), 83 FR 10937 (March 13, 2018) (SR-NASDAQ-2017-074).
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    Currently, a Midpoint Extended Life Order must be entered with a 
size of at least one round lot and any shares of a Midpoint Extended 
Life Order remaining after an execution that are less than a round lot 
will be cancelled by the System. Over the last several years, the 
number of high priced securities has increased (see Figure 1) and the 
number of stock splits have decreased (see Figure 2).
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    There is a notably large percentage of odd lot trades in relatively 
high priced securities. For example, in October 2018, such transactions 
accounted for approximately 5 percent of total consolidated volume 
during the month, and accounted for 30 percent of all transactions 
occurring in the month across all securities. In contrast, for stocks 
with a price of $500 or more during the same timeframe the Exchange 
observed that 39 percent of total consolidated volume was due to odd 
lot trades and 85 percent of all transactions occurring in the month 
were odd lots. Thus, a significant number of higher priced securities 
have transactions occurring in odd lot transactions. The Exchange 
believes that allowing entry of odd lot-sized Midpoint Extended Life 
Orders will eliminate a limitation of the Order and give users more 
control over their Orders.
    In the first quarter of 2019 for example, the Exchange executed 
approximately 2,000,000 trades in one issuer whose stock has a price 
greater than $1,000, with an average trade size of approximately 34 
shares. Using this stock's closing price of approximately $1,700 for 
March 2019, the notional value of a 34 share trade would be $56,000. 
Most would agree that $56,000 in value does not represent a small 
trade. For this stock to execute as a Midpoint Extended Life Order, the 
average trade size would need to triple to achieve the current minimum 
Order size of 100 shares or one round lot for this particular stock, 
and as such has only traded 20 times as a Midpoint Extended Life Order 
in the first quarter of 2019. Nasdaq believes that eliminating the 
minimum Order size from the Midpoint Extended Life Order will provide 
like-minded investors the opportunity to transact in high-priced stocks 
such as the example above in an ecosystem where the quote remains 
stable approximately 88--90 percent of time one second post-
execution,\7\ notably higher than off-exchange venues where the quote 
remains stable 75-80 percent of time one second post-execution based on 
Nasdaq's internal assessment.
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    \7\ As of April 2019.

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    As of March 12, 2019, there are nearly 550 securities that trade on 
the Exchange that are priced greater than $100, 76 securities greater 
than $250, 24 securities greater than $500, and 10 securities over 
$1,000. Odd lot Orders account for 46 percent of trades for stocks 
above $100, and for securities over $500 this number rises to over 85 
percent. Odd lot transactions now represent a large percentage of 
trades, yet are ineligible for the Midpoint Extended Life Order, even 
for transactions that would be identified by many as institutional 
sized and some even being classified as a block trade.\8\
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    \8\ See, e.g., https://otctransparency.finra.org/otctransparency/AtsBlocks (providing Block Data of $100,000 
transactions and greater).
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    Nasdaq recognizes that not all participants may desire to execute 
odd lots. Such participants may elect to use the Minimum Quantity Order 
Attribute to avoid such transactions, much like they would do for 
executing on the Nasdaq Book. Nasdaq notes that other exchanges and 
many Alternative Trading Systems (ATSs) allow for odd lots and 
customers there use minimum quantity attributes to manage the execution 
sizes for their orders. The Exchange notes that the Minimum Quantity 
Order Attribute is limited to Orders of at least one round lot upon 
entry.\9\ Consequently, members entering odd lot-sized Midpoint 
Extended Life Orders would not be able to limit their interaction with 
other odd lot-sized Midpoint Extended Life Orders based on size, which 
the Exchange believes is appropriate because members understand the 
limitation and have made the decision to accept such possible 
interaction.
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    \9\ See Rule 4703(e).
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    In proposing the Midpoint Extended Life Order round lot 
requirement, the Exchange noted that round lots would promote size and 
provide members with the most efficient processing of Midpoint Extended 
Life Orders.\10\ This was based on the Exchange's observation at the 
time that many participants that would likely avail themselves of 
Midpoint Extended Life Orders tend to route their Orders in round lot 
sizes, and that many strategies are modeled based on receipt of a round 
lot execution. Nasdaq has since observed that the members that use 
Midpoint Extended Life Orders are now modeling strategies based on 
individual securities or grouping of securities based on attributes 
such as price, average daily volume, and volatility. Consequently, 
round lot size is no longer a wide-spread need among users of Midpoint 
Extended Life Orders. Notwithstanding, as noted above a member may 
elect to associate a Minimum Quantity Order Attribute with its round 
lot-sized Midpoint Extended Life Order to avoid interaction with odd 
lot-sized Midpoint Extended Life Orders, which because of their size 
may not be attractive as a contra-side Order to some market 
participants.\11\ Last, the Exchange notes that most other Order Types 
under Rule 4702 allow entry of odd lot-sized Orders. Permitting entry 
of odd lot-sized Midpoint Extended Life Orders will increase liquidity 
in the Order Type and improve the chances that a Midpoint Extended Life 
Order will receive an execution for higher priced stocks.
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    \10\ See supra note 6.
    \11\ For example, an odd lot-sized Midpoint Extended Life Order 
takes on less risk as it rests in the Holding Period for any given 
security. As noted above, this may not be the case when comparing an 
odd lot-size Midpoint Extended Life Order in a high priced security 
and a Midpoint Extended Life Order in a low priced security of a 
round lot size.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by allowing for more widespread use of Midpoint Extended Life 
Orders, particularly in high priced securities. Nasdaq adopted the 
Midpoint Extended Life Order to address the needs of market 
participants that focus their trading on receiving midpoint execution 
where time to execution is less important when working to meet their 
long term investment needs. As described above, the Exchange believes 
the proposed change will benefit market participants by expanding the 
available sizes of orders available which in turn will provide greater 
opportunities for interaction in higher priced securities in Midpoint 
Extended Life Orders. The Exchange notes that members with round lot-
sized Midpoint Extended Life Orders that are seeking to interact with 
only other round lot-sized Midpoint Extended Life Orders may do so by 
applying the Minimum Quantity Order Attribute. Members that have odd 
lot-sized Midpoint Extended Life Orders are unable to similarly limit 
the size of Order [sic] with which they interact, since the Minimum 
Quantity Order Attribute is limited to Orders with a size of at least 
one round lot. The Exchange believes that this is consistent with the 
Act because it is the same limitation that all other Orders have with 
respect to the use of Minimum Quantity Order Attribute and a member may 
merely enter a round lot-sized Midpoint Extended Life Order with a 
Minimum Quantity Order Attribute if it does not want to interact with 
odd lot-sized Midpoint Extended Life Orders. Moreover, the Exchange 
believes the limitation is consistent with the Act because members 
understand the limitation and have made the decision to accept possible 
interaction with Orders of any size. For these reasons, the Exchange 
believes that the proposed change is consistent with the purposes of 
the Order Type.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Midpoint Extended Life 
Order was adopted as a pro-competitive measure to improve participation 
on the Exchange by allowing certain market participants that may 
currently be underserved on regulated exchanges to compete based on 
elements other than speed. The proposed change is a natural extension 
of the original proposal because it broadens interaction opportunities 
in Midpoint Extended Life Orders, particularly in higher priced stocks, 
while also ensuring that market participants use the Order Type 
consistent with its original purposes. In sum, the proposed change will 
not burden competition but rather may promote competition for liquidity 
in Midpoint Extended Life Orders by expanding the pool of market 
participants that may seek to enter such Orders. These market 
participants may have otherwise found the cost of a round lot Order in 
the securities in which they desire to trade as Midpoint Extended Life 
Orders too high. The proposed change will not place a burden on 
competition among market venues, as any market may adopt an order type 
that operates like the Midpoint Extended Life Order, including allowing 
for the execution of odd lot-sized orders, as proposed herein.

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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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-2019-044 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-2019-044. 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-2019-044, and should be submitted 
on or before June 25, 2019.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-11545 Filed 6-3-19; 8:45 am]
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