[Federal Register Volume 84, Number 116 (Monday, June 17, 2019)]
[Notices]
[Pages 28107-28110]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12655]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86083; File No. SR-NASDAQ-2019-048]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 4702 To 
Establish the ``Midpoint Extended Life Order + Continuous Book'' as a 
New Order Type

June 11, 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 29, 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 amend Rule 4702 to establish the 
``Midpoint Extended Life Order + Continuous Book'' as a new Order Type.
    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 proposes to: (1) Amend Rule 4702(b) to establish the 
``Midpoint Extended Life Order + Continuous Book'' or ``M-ELO+CB'' as a 
new Order Type on the Exchange; and (2) amend Rule 4703(n) to permit 
midpoint orders on the Continuous Book to execute against M-ELO+CBs 
when the Midpoint Trade Now Attribute is enabled on such midpoint 
orders.

Midpoint Extended Life Orders With Continuous Book

    On March 7, 2018, the Commission issued an order approving the 
Exchange's proposal to adopt the Midpoint Extended Life Order or ``M-
ELO'' as a new Order Type.\3\ A M-ELO is a non-displayed order that is 
available to all members but interacts only with other M-ELOs. It is 
priced at the midpoint between the National Best Bid and Offer 
(``NBBO'') and it does not become eligible for execution until it 
completes a one-half second holding period (the ``Holding Period'').\4\ 
Once the Holding Period elapses, a M-ELO becomes eligible for execution 
against other M-ELOs on a time-priority basis.\5\ Since its 
implementation the Midpoint Extended Life Order Type has achieved its 
design expectations. Approximately 12 million shares transact as 
Midpoint Extended Life Orders a day, interacting only with other 
Midpoint Extended Life Orders thus avoiding interaction with 
Intermarket Sweep Orders, IOC Orders and other aggressively price Order 
Types.
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    \3\ See Securities Exchange Act Release No. 34-82825 (Mar. 7, 
2018), 83 FR 10937 (Mar. 13, 2018).
    \4\ If a member modifies a M-ELO during the Holding Period, 
other than to decrease the size of the order or to modify the 
marking of a sell order as long, short, or short exempt, then such 
modification will cause the Holding Period to reset.
    \5\ If a member modifies a M-ELO after the Holding Period 
elapses, other than to decrease the size of the order or to modify 
the marking of a sell order as long, short, or short exempt, then 
such modification will trigger a new Holding Period for the order.
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    M-ELO+CB is a variation on the M-ELO concept. That is, a M-ELO+CB 
is an Order Type that has all of the characteristics and attributes of 
a regular M-ELO, except that, in addition to executing against other M-
ELO+CBs and M-ELOs, it also may access additional sources of ``M-ELO-
like'' liquidity on the Exchange's Continuous Book.
    Specifically, if a member enters a M-ELO+CB, then the M-ELO+CB will 
be subject to the same one-half second

[[Page 28108]]

Holding Period as a regular M-ELO. Upon expiration of the Holding 
Period, the M-ELO+CB will become available for execution, at the 
midpoint of the NBBO, against other M-ELOs and M-ELO+CBs. Additionally, 
it will become eligible to execute, again at the midpoint of the NBBO, 
against Non-Displayed Orders with Midpoint Pegging and Midpoint Peg 
Post-Only Orders (collectively, ``Midpoint Orders'') if: (1) The 
Midpoint Orders have the Midpoint Trade Now Attribute enabled (as 
discussed below); (2) the Midpoint Order has rested on the Exchange's 
Continuous Book for at least one-half second; (3) no other order is 
resting on the Continuous Book that has a more aggressive price than 
the current midpoint of the NBBO; and (4) the resting Midpoint Order 
fulfills any minimum quantity restriction that exists for the M-ELO+CB. 
The execution priority for the above orders will be ranked based on the 
time at which such orders become eligible to execute against each 
other.
    In all respects other than described above, a M-ELO+CB will be 
identical to an ordinary M-ELO. That is, a M-ELO+CB may be assigned a 
limit price, in which case it would be: (1) Eligible for execution in 
time priority after satisfying the Holding Period if upon acceptance of 
the order by the system, the midpoint price is within the limit set by 
the participant; or (2) held until the midpoint falls within the limit 
set by the participant, at which time the Holding Period would commence 
and thereafter the system would make the order eligible for execution 
in time priority.
    Also like an ordinary M-ELO, if a M-ELO+CB is modified by a member 
(other than to decrease the size of the order or to modify the marking 
of a sell order as long, short, or short exempt) during the Holding 
Period, the system would restart the Holding Period. Movements in the 
NBBO while a MELO+CB is in the Holding Period would not reset the 
Holding Period, even if, as a result of the NBBO move, the MELO+CB's 
limit price is less aggressive than the NBBO midpoint. Also, if a 
MELO+CB has met the Holding Period, but the NBBO midpoint is no longer 
within its limit, it would nonetheless be ranked in time priority among 
other M-ELOs and M-ELO+CBs if the NBBO later moves such that the 
midpoint is within the order's limit price (i.e., no new Holding 
Period).
    MELO+CB Orders may be entered via any of the Exchange's order entry 
protocols (other than QIX). If there is no NBB or NBO, the Exchange 
would accept M-ELO+CBs but would not allow M-ELO+CB executions until 
there is an NBBO. M-ELO+CBs would be eligible to execute if the NBBO is 
locked. If the NBBO is crossed, M-ELO+CBs would be held by the system 
until such time that the NBBO is no longer crossed, at which time they 
would be eligible to trade. M-ELO+CBs may be cancelled at any time, 
including during the Holding Period.
    M-ELO+CBs would be active only during Market Hours. M-ELO+CBs 
entered during Pre-Market Hours would be held by the system in time 
priority until Market Hours. M-ELO+CBs entered during Post-Market Hours 
would not be accepted by the system, and M-ELO+CBs remaining unexecuted 
after 4:00 p.m. ET would be cancelled by the system. M-ELO+CB Orders 
would not be eligible for the Exchange's Opening, Halt, and Closing 
Crosses.
    M-ELO+CBs must be entered with a size of at least one round lot, 
and any shares of a M-ELO+CB remaining after an execution that are less 
than one round lot would be cancelled.\6\ M-ELO+CBs may have a minimum 
quantity order attribute. M-ELO+CBs may not be designated with a time-
in-force of immediate or cancel and are ineligible for routing. They 
also may not have the discretion, reserve size, attribution, 
intermarket sweep order, display, or trade now order attributes.
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    \6\ The Exchange notes that it recently filed a proposal to 
allow for odd-lot sized orders to be eligible for M-ELOs. See SR-
NASDAQ-2019-044 (May 20, 2019). If and when the SEC approves this 
filing, the Exchange intends for it to also apply to M-ELO+CBs.
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    M-ELO+CB executions would be reported to Securities Information 
Processors and provided in the Exchange's proprietary data feed without 
any new or special indication. The Exchange would, however, include in 
its existing volume reports delayed weekly aggregated statistics, as 
well as delayed monthly aggregated block-sized trading statistics, for 
M-ELO+CB executions. Specifically, the Exchange would add to the 
existing reports it publishes on Nasdaqtrader.com weekly aggregated 
statistics showing the number of shares and transactions of M-ELO+CBs 
executed on the Exchange by security. This information would be 
published with a two-week delay for NMS stocks in Tier 1 of the LULD 
Plan, and a four-week delay for all other NMS stocks. The Exchange also 
would add to the existing reports it publishes on Nasdaqtrader.com 
monthly aggregated block-sized trading statistics of total shares and 
total transactions of M-ELO+CBs executed on the Exchange. This 
information would be published no earlier than one month following the 
end of the month for which trading was aggregated. Under the proposal, 
a transaction would be considered ``block-sized'' if it meets any of 
the following criteria: (1) 10,000 or more shares; (2) $200,000 or more 
in value; (3) 10,000 or more shares and $200,000 or more in value; (4) 
2,000 to 9,999 shares; (5) $100,000 to $199,999 in value; or (6) 2,000 
to 9,999 shares and $100,000 to $199,999 in value.
    As part of the surveillance the Exchange currently performs, M-
ELO+CBs would be subject to real-time surveillance to determine if they 
are being abused by market participants. In addition, as is the case 
for ordinary M-ELOs, the Exchange will monitor the use of M-ELO+CBs 
with the intent to apply additional measures, as necessary, to ensure 
their usage is appropriately tied to the intent of the Order Type. This 
monitoring may include metrics tied to participant behavior, such as 
the percentage of M-ELO+CBs that are cancelled prior to the completion 
of the Holding Period, the average duration of M-ELO+CBs, and the 
percentage of M-ELO+CBs where the NBBO midpoint is within the limit 
price when received. The Exchange is committed to determining whether 
there is opportunity or prevalence of behavior that is inconsistent 
with normal risk management behavior. Manipulative abuse is subject to 
potential disciplinary action under the Exchange's Rules, and other 
behavior that is not necessarily manipulative but nonetheless 
frustrates the purposes of the M-ELO+CB Order Type may be subject to 
penalties or other participant requirements to discourage such 
behavior, should it occur.
Amending the Midpoint Trade Now Attribute To Enable Execution Against 
M-ELO+CB
    To facilitate the establishment of the M-ELO+CB Order Type, the 
Exchange concurrently proposes to amend the Midpoint Trade Now 
Attribute, at Rule 4703(n), such that if a participant opts to enable 
Midpoint Trade Now on a Midpoint Order, then in addition to the normal 
functionality that the Attribute provides,\7\ the Attribute would also 
permit the Midpoint Order to execute against a M-ELO+CB (provided that 
the Midpoint Order meets the eligibility

[[Page 28109]]

requirements for doing so). In other words, a Midpoint Order with the 
Midpoint Trade Now Attribute enabled would become eligible to execute 
against a marketable M-ELO+CB only if it does not first execute against 
another order on the Continuous Book within one-half second of its 
entry. Executions with M-ELO+CB orders will be trade reported like any 
other time they remove liquidity.
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    \7\ The Midpoint Trade Now Order Attribute presently allows a 
resting Order that becomes locked at its non-displayed price by an 
incoming Midpoint Peg Post-Only Order to automatically execute 
against crossing or locking interest, including potentially against 
the Midpoint Peg Post-Only Order that locked the resting Order, as a 
liquidity taker. See Rule 4703(n); Securities Exchange Act Release 
No. 84621 (Nov. 19, 2018), 83 FR 60514 (Nov. 26, 2018) (SR-NASDAQ-
2018-090).
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Example of Use of M-ELO+CB
    The following example demonstrates how the M-ELO+CB will operate in 
practice. Assume for purposes of this example that the NBBO remains 
constant at $84.00 x $86.00, such that the midpoint is $85.00. At 
10:05:27:00 a.m., Participant A enters a Midpoint Order on the 
Continuous Book with the Midpoint Trade Now Attribute enabled. The 
Midpoint Order is to sell 1,000 shares with a limit price of $85.00. 
The Midpoint Order posts to the Continuous Order Book at $85.00. At 
10:05:37:00 a.m., Participant B enters a M-ELO+CB to buy 1,000 shares 
at $85.00. After the Holding Period expires, the M-ELO+CB posts to the 
M-ELO Order Book at $85.00. No other M-ELOs or M-ELO+CBs are available 
to execute against the M-ELO+CB at the time it becomes marketable. 
Because the Midpoint Order with Midpoint Trade Now has rested on the 
Continuous Order Book for more than one-half second, it becomes 
eligible to match against the M-ELO+CB, which continues to rest on the 
M-ELO Book. Because no other orders are resting on the Continuous Book 
with a price more aggressive than the NBBO, the M-ELO+CB will execute 
in full against the Midpoint Order at $85.00.
Implementation
    The Exchange plans to implement M-ELO+CB within thirty days after 
Commission approval of the proposal. The Exchange will make the M-
ELO+CB available to all members and to all securities upon 
implementation. The Exchange will announce the implementation date by 
Equity Trader Alert.\8\
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    \8\ The Exchange plans to propose a fee structure for the M-
ELO+CB in a subsequent Commission rule filing.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The reasons why the M-ELO+CB Order Type is consistent with the Act 
are generally the same as those that the Commission identified in its 
order approving the M-ELO Order Type.\11\ The Exchange does not believe 
that the design of the M-ELO+CB presents concerns that are unique or 
materially different from those that the M-ELO presents.
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    \11\ See Securities Exchange Act Release No. 34-82825, supra, 83 
FR at 10938-41.
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    For example, just as the Commission determined that the M-ELO 
``could create additional and more efficient trading opportunities on 
the Exchange for investors with longer investment time horizons, 
including institutional investors, and provide these investors with an 
ability to limit their information leakage and the market impact that 
could result from their orders,'' \12\ so too will the M-ELO+CB do so. 
By proposing to add M-ELO+CB as a new Order Type, the Exchange intends 
to enhance the utility of the M-ELO concept to investors by providing 
them with opportunities to execute M-ELOs where they cannot do so now. 
Indeed, a M-ELO+CB will have all of the characteristics and offer all 
of the benefits of an ordinary M-ELO, except that it will also afford 
M-ELO investors the ability to accomplish their investment strategies 
by sourcing liquidity from the Nasdaq Continuous Book, where 
approximately 55 million shares trade at Midpoint a day.
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    \12\ See id. at 10938-39.
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    The proposal would remain consistent with the underlying purpose of 
a M-ELO, which is to enable investors to source liquidity on the 
Exchange by limiting interaction with intermarket sweep orders or other 
aggressively priced order types. By allowing M-ELO+CBs to access 
liquidity in the Continuous Book, the Exchange would not dilute the 
purpose of the M-ELO because the Exchange would only permit the M-
ELO+CB to access liquidity on the Continuous Book that resembles M-
ELOs--including because eligible orders must have rested on the Book 
for at least one-half second and because they must be non-displayed 
orders and execute at the midpoint of the NBBO. In addition, the option 
to access qualified midpoint liquidity on the continuous book is purely 
voluntary.
    The proposal would also benefit those participants with Midpoint 
Orders resting on the Exchange's Continuous Book, insofar as the 
proposal would provide additional opportunities for such Midpoint 
Orders to execute against M-ELO+CBs if the Midpoint Order user 
voluntarily chooses to do so.
    Like the M-ELO, the M-ELO+CB will not discriminate unfairly against 
other market participants because it will be available for voluntary 
use by all Exchange members. Moreover, the proposal is not unfairly 
discriminatory against participants that enter Midpoint Orders that 
have not rested for at least one-half second because imposition of this 
resting condition is necessary to ensure that M-ELO+CBs fulfill their 
purpose without the transitory risk of a change to the NBBO that may 
have the effect of an adverse execution. And again, participants will 
have a choice as to whether they wish for their Midpoint Orders to 
interact with M-ELO+CBs.
    Like all M-ELOs and all other orders entered into Nasdaq, the 
Exchange will conduct real-time surveillance to monitor the use of M-
ELO+CBs to ensure that such usage is appropriately tied to the intent 
of the Order Type. Also like the M-ELO, transactions in M-ELO+CB will 
be reported to the Securities Information Processor and will be 
provided in Nasdaq's proprietary data feed in the same manner as all 
other transactions occurring on Nasdaq are done currently, namely, 
without any new or special indication that it is a M-ELO+CB execution. 
The Exchange believes that doing so is important to ensuring that 
investors are protected from any market impact that may occur if M-ELO 
or M-ELO+CB executions were reported with a special indication.
    The Exchange does not believe that the proposed M-ELO+CB will 
negatively affect the quality of the market. To the contrary, the 
Exchange believes that the addition of M-ELO+CB will draw new market 
participants to the Exchange's transparent and well-regulated market, 
including participants that were previously not utilizing M-ELO orders. 
Moreover, like the M-ELO, the M-ELO+CB will allow longer term investors 
an opportunity to find like-minded counterparties at the midpoint on 
Nasdaq. It will also allow participants with Midpoint Orders the option 
to choose for their Orders to interact with M-ELO+CBs, and if so, to 
execute in circumstances where they would not otherwise. Thus, the 
proposal would enhance liquidity opportunities of midpoint executions 
on the Exchange.

[[Page 28110]]

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 Exchange believes that the introduction of the M-ELO+CB will 
only boost the utility of the M-ELO among market participants who want 
the benefits of M-ELO but require additional trading flexibility. 
Accordingly, the Exchange expects that its proposal will draw new 
market participants to Nasdaq and increase the extent to which existing 
participants utilize the M-ELO concept. To the extent the proposed 
change is successful in attracting additional market participants, 
Nasdaq believes that the proposed change will promote competition among 
trading venues by making Nasdaq a more attractive trading venue for 
long-term investors and therefore capital formation.
    Additionally, adoption of M-ELO+CB will not burden any market 
participants. Just as with an ordinary M-ELOs, the M-ELO+CB will be 
available to all Nasdaq members and it will be available on an optional 
basis. Thus, any member that seeks to avail itself of the benefits of a 
M-ELO+CB can choose accordingly. Although the proposal provides 
potential benefits for investors that select the M-ELO+CB order type, 
the Exchange believes that all market participants will benefit to the 
extent that this proposal contributes to a healthy and attractive 
market that is attentive to the needs of all types of investors.
    The proposal also will not adversely impact market participants 
that choose not to use this M-ELO+CB because no changes need to be made 
to participants' systems to account for it. As discussed above, M-
ELO+CB executions will be reported the same as other executions, 
without any new or special indicator.
    Similarly, the proposal will benefit members that enter Midpoint 
Orders on the Continuous by providing them with flexibility to have 
their orders execute in situations where they would not do so now. 
Again, however, this flexibility will be optional. Any member that 
wants its Midpoint Orders to interact with M-ELO+CBs can choose 
accordingly.
    In any event, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily choose 
between competing venues if they deem participation in Nasdaq's market 
is no longer desirable. In such an environment, the Exchange must 
carefully consider the impact that any change it proposes may have on 
its participants, understanding that it will likely lose participants 
to the extent a change is viewed as unfavorable by them. Because 
competitors are free to modify the incentives and structure of their 
markets, the Exchange believes that the degree to which modifying the 
market structure of an individual market may impose any burden on 
competition is limited. Last, to the extent the proposed change is 
successful in attracting additional market participants, Nasdaq also 
believes that the proposed change will promote competition among 
trading venues by making Nasdaq a more attractive trading venue for 
long-term investors and therefore capital formation.

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-2019-048 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-2019-048. 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-2019-048, and should be submitted 
on or before July 8, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12655 Filed 6-14-19; 8:45 am]
 BILLING CODE 8011-01-P