[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
[[Page 25845]]
(``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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[[Page 25847]]
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.
[[Page 25848]]
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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