[Federal Register Volume 84, Number 164 (Friday, August 23, 2019)]
[Notices]
[Pages 44343-44346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18166]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86705; File No. SR-NASDAQ-2019-061]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change Relating to the Nasdaq
Official Closing Price for Nasdaq-Listed Exchange-Traded Products
August 19, 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 August 8, 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 a rule change regarding how the Nasdaq
Official Closing Price (``NOCP'') will be determined for a Nasdaq-
listed security that is an exchange-traded product (as defined herein).
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
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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 Rule 4754(b) details the processing of the Nasdaq Closing
Cross, including how the Exchange determines the NOCP. The Exchange
proposes to amend Nasdaq Rule 4754 to amend how the NOCP \3\ will be
determined for an Exchange-listed security that is an exchange-traded
product (``ETP'') if the Exchange does not conduct a closing cross
(``Closing Cross'').\4\ ETP for purposes of the proposed rule change
means a series of Portfolio Depository Receipts, Index Fund Shares,
Managed Fund Shares, or Trust Issued Receipts (as defined in Nasdaq
Rules 5705(a) 5705(b), 5735, and 5720, respectively), securities linked
to the performance of indexes and commodities (including currencies)
(as defined in Nasdaq Rule 5710), Index-Linked Exchangeable Notes,
Equity Gold Shares, Trust Certificates, Commodity-Based Trust Shares,
Currency Trust Shares, Commodity Index Trust Shares, Commodity Futures
Trust Shares, Partnership Units, Trust Units, Managed Trust Securities,
or Currency Warrants (as defined in Rule 5711(a)-(k)).
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\3\ As set forth in Nasdaq Rule 4754(b)(4), the NOCP will be the
Closing Cross price for stocks that participate in the Closing
Cross.
\4\ The proposed rule change does not apply to Nasdaq Rule 5745
Exchange-Traded Managed Fund Shares (``NextShares'') or corporate
securities. Additionally, it is unnecessary to apply this rule
change to NextShares because its' reference trading price is reset
to 100 every day for quoting purposes around which markets are made.
The actual NAV price does not correspond to this reference price and
therefore the midpoints of the reference price are not applicable in
determining a more accurate fair value of the basket. Nasdaq is not
proposing this change for corporate securities because unlike ETPs
they do not have a known NAV along with an arbitrage component that
allows for convergence in price and keeps the prices in line.
Corporate securities are priced based upon supply demand factors at
moments in time, which result in executed transactions. These
transactions are generally recognized as the most relevant current
pricing valuation. Feedback from industry participants has not shown
any desire to alter closing price valuation processes for commons
stocks.
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The proposed functionality in this filing is similar to
functionality that has already been approved by the Commission and is
operational on NYSE Arca, Inc. (``Arca'') (the ``Arca Rule''),\5\ as
well as was approved for Bats BZX Exchange, Inc.\6\
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\5\ See Securities Exchange Act Release No. 82907 (March 20,
2018), 83 FR 12980 (March 26, 2018) (SR-NYSEArca-2018-08) (order
approving proposed changes to Arca Rule 1.1(ll) related to
determining an Official Closing Price).
\6\ See Securities Exchange Act Release No. 84738 (Dec. 6,
2018), 83 FR 63932 (Dec. 12, 2018) (SR-CboeBZX-2018-079) (order
approving proposed changes to BZX Rule 11.23(c)(2)(B) related to how
it would determine the BZX Official Closing Price[thinsp]).
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Currently, the NOCP is derived from the Closing Cross \7\ on Nasdaq
if the security has a closing cross and reflects actual sale prices at
one of the most liquid times of the day.\8\ The Exchange notes that it
is not proposing to make changes to the process for determining the
price level at which the Closing Cross will occur. Nasdaq believes its
Closing Cross has proven to be a valuable pricing tool for issuers,
traders, and investors alike; and Nasdaq continually works to enhance
the experience for those that rely upon it.
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\7\ All orders executed in the Closing Cross will be executed at
the Closing Cross price, trade reported anonymously, and
disseminated via the consolidated tape. The Closing Cross price will
be the NOCP for stocks that participate in the Closing Cross.
Fifteen minutes after the close of trading, Nasdaq will disseminate
via the network processor a trade message setting the NOCP as the
official Consolidated Last Sale price in each Nasdaq-listed ETP in
which one round lot or more is executed in the Closing Cross where
the closing price differs from the Consolidated Last Sale price.
\8\ The Closing Cross is designed to gather the maximum
liquidity available for execution at the close of trading, and to
maximize the number of shares executed at a single price at the
close of the trading day. The Closing Cross is made highly
transparent to all investors through the widespread dissemination of
stock-by-stock information about the Closing Cross, including the
potential price and size of the Closing Cross.
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The Exchange proposes to amend Nasdaq Rule 4754(b)(4) to amend how
the NOCP for a Nasdaq-listed security that is an ETP will be determined
if the security does not have a closing cross. Thinly-traded ETPs are
less likely to have a Closing Cross, which can result in a closing
price that is based on a stale price that is no longer reflective of
the value of the security. Specifically, if an ETP is thinly-traded it
is currently possible that the NOCP for it will be based on a Nasdaq
Last Sale price that may not necessarily reflect the current value of
the security. Providing an updated price aligned with the current
market value based on quotations in an ETP that is thinly-traded will
provide investors and issuers with a more accurate price to mark
performance of their funds and portfolios.
Nasdaq Rule 4754(b) outlines the process for determining the price
level at which the Closing Cross will occur.\9\ If a Nasdaq-listed
security that is an ETP has a Closing Cross, it will continue to be
priced using the current process for calculating the closing price.
However, if a Nasdaq-listed security that is an ETP does not have a
Closing Cross, then the Exchange believes that a time-weighted average
based on the midpoint (``T-WAM'') of the NBBO \10\ leading into the
close is likely to be more indicative of the current value of the
security. Nasdaq believes the midpoint of current quotations is more
reflective of the current value of the ETP than a potentially stale
last sale.
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\9\ The Exchange notes that it is not proposing to make changes
to the process for determining the price level at which the Closing
Cross will occur.
\10\ As defined in Nasdaq Rule 4701(j), the term ``NBBO'' shall
mean the ``National Best Bid and National Best Offer''.
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The T-WAM price will be a time-weighted average midpoint value
calculation \11\ that uses eligible quotes during the time period
3:58:00 p.m.-3:59:55 p.m. based on quotes observed each second.\12\ For
example, NBBO = 19.99 x 20.01 (midpoint = $20.00) starting at 3:58:00
p.m. through 3:58:59 p.m. and then the NBBO is updated to 19.95 x 19.97
(midpoint = $19.96) from 3:59:00 p.m. through 3:59:55 p.m., the T-WAM
calculation will be $19.98 (19.9807).
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\11\ The T-WAM calculation will take the midpoint of the NBBO on
a 1-second basis and weight according to time-frequency during the
time period 3:58:00 p.m.-3:59:55 p.m.
\12\ Nasdaq's current process accepts limit on close (``LOC'')
orders for participation in the Closing Cross until 3:58:00 p.m.,
this is the last opportunity for market participants to enter an on-
close order type that can contribute to price discovery. In
instances when there is no Closing Cross at 4:00:00 p.m., internal
research by the Exchange has shown that using the T-WAM of the time
period between 3:58:00 p.m.-3:59:55 p.m. results in a price that
reflects a fair current valuation. Nasdaq's decision to use this
time period included an evaluation of the T-WAM calculation price
compared against the historical data of the prior day's actual ETP
Closing Cross prices. Nasdaq's internal research data demonstrated
that the calculated T-WAM price was reflective of the price that was
similarly calculated by the Closing Cross. Nasdaq's analysis
provided confidence that for thinly-traded ETPs the 3:58:00 p.m.-
3:59:55 p.m. time period for the T-WAM, will result in an improved
valuation methodology versus using the Nasdaq Last Sale.
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In cases where the T-WAM is reflected as the ETP's NOCP, the T-WAM
calculation will only use eligible quotes that meet the following
validation logic: An eligible quote is defined as a quote whose spread
is no greater than a value of 10% of the midpoint price. All quoted
spreads within the T-WAM's stated time period in proposed Nasdaq Rule
4754(b)(4)(A)(i) that are greater than 10% of the midpoint would be
excluded from the T-WAM calculation. For example: If the NBBO = 19.99 x
20.01 (midpoint = $20) validation logic would allow a maximum quote
width up to $2 to be used as part of the calculation
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($20.00*10% = $2). If the NBBO was 17.00 x 23.00 (midpoint = $20.00)
the midpoint would not be used in the T-WAM calculation because it
violates the maximum quote width ($20.00*10% = $2). The T-WAM also will
exclude crossed NBBO markets. The Exchange believes that the proposed
methodology will result in a NOCP that is more reflective of the
current market value of the ETP on that trading day.
If there are no eligible quotes to determine a T-WAM within the
time period or if the ETP is halted, then Nasdaq will use the
Consolidated Last Sale price prior to 4:00:00 p.m. as the NOCP. For an
ETP that is already listed on Nasdaq and does not have any eligible
quotes for the T-WAM methodology or any Consolidated Last Sale prices
that day, the NOCP will be the prior day's NOCP. For an ETP that has
transferred its listing to Nasdaq and does not have any eligible quotes
for the T-WAM methodology or any Consolidated Last Sale prices that
day, the NOCP will be the prior day's closing price as disseminated by
the primary listing market that previously listed it. For an ETP that
is a new listing to Nasdaq and does not have any eligible quotes for
the T-WAM methodology or any Consolidated Last Sale prices that day,
the NOCP will not be disseminated.
In order to implement these proposed changes, the Exchange is
proposing to amend Nasdaq Rule 4754(b)(4) by adding subsection (A) to
this rule. Nasdaq Rule 4754(b)(4), as amended, will define the term
``Exchange-Traded Product'' and provide that in the event that a Nasdaq
listed ETP does not have a closing cross then the T-WAM of the NBBO
will be used.
Implementation
The Exchange will implement the proposed rule change for
determining the NOCP as soon as is practicable after the approval date
of this proposed rule change, which may be as early as during the third
quarter of 2019, and will announce the implementation date via Nasdaq
Equity Trader Alert.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\13\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\14\ in particular, because it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to, and
perfect the mechanisms 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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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market and
a national market system because it would provide for a method of
determining the NOCP in an Exchange-listed security that is an ETP if
there is no Closing Cross, as well add a definition of ``Exchange-
Traded Product'' to the rule that will aid market participants in
understanding the rule.\15\ The Exchange believes that the proposed
methodology provides for a more up-to date indication of the value of
such ETP if there have not been Nasdaq last sale trades leading in to
the close of trading. Specifically, this is consistent with the Act
because when there is no Closing Cross at 4:00:00 p.m., the Exchange's
internal research has shown that using the T-WAM of the time period
between 3:58:00 p.m.-3:59:55 p.m. results in a price that reflects a
fair current valuation and is reflective of the price that was
similarly calculated by the Closing Cross.\16\ This results in an
improved valuation methodology versus using the Nasdaq Last Sale to the
benefit of market participants since it will provide a closing price
that more accurately reflects the most recent and reliable market
information possible.
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\15\ The definition of ``Exchange-Traded Product'' excludes
NextShares and does not apply to common stock. Specifically, ETP for
purposes of the proposed rule change means a series of Portfolio
Depository Receipts, Index Fund Shares, Managed Fund Shares, or
Trust Issued Receipts (as defined in Nasdaq Rules 5705(a) 5705(b),
5735, and 5720, respectively), securities linked to the performance
of indexes and commodities (including currencies) (as defined in
Nasdaq Rule 5710), Index-Linked Exchangeable Notes, Equity Gold
Shares, Trust Certificates, Commodity-Based Trust Shares, Currency
Trust Shares, Commodity Index Trust Shares, Commodity Futures Trust
Shares, Partnership Units, Trust Units, Managed Trust Securities, or
Currency Warrants (as defined in Rule 5711(a)-(k)).
\16\ See supra footnote 12.
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The Exchange further believes that since the proposed T-WAM
methodology, described herein, will result in a NOCP that is more
reflective of the current market value of the ETP on that trading day
and it will serve to remove impediments to and perfect the mechanism of
a free and open market and a national market system because it will
provide for a more robust mechanism to determine the value of an
affected ETP for purposes of determining a NOCP.
The Exchange also believes that the proposed methodology for
determining a NOCP would be appropriate for ETPs because if they are
thinly-traded, the price of the Nasdaq Last Sale trade that occurred
earlier in a trading day or even from a prior trading day may no longer
be reflective of the value of such product, which should be priced
relative to the value of the components of such ETP. As such, the
Exchange believes recent quoting activity likely will be more
reflective of the current value of the ETP. Furthermore, the Exchange
is proposing to use the T-WAM of the NBBO to measure such quoting
activity in order to avoid overly weighting a potentially stale quote
that may occur leading into the close.
Currently, the NOCP is derived from the Closing Cross on Nasdaq if
the security has a closing cross and reflects actual sale prices. If a
Nasdaq-listed security that is an ETP has a Closing Cross, it will
continue to be priced using the current process for calculating the
closing price. Under the proposed rule change, if a Nasdaq-listed
security that is an ETP does not have a Closing Cross, then the T-WAM
of the NBBO will be used as the NOCP. If there are no eligible quotes
to determine a T-WAM within the time period or if the ETP is halted,
then Nasdaq will use the Consolidated Last Sale price prior to 4:00:00
p.m. as the NOCP. For an ETP that is already listed on Nasdaq and does
not have any eligible quotes for the T-WAM methodology or any
Consolidated Last Sale prices that day, the NOCP will be the prior
day's NOCP .For an ETP that has transferred its listing to Nasdaq and
does not have any eligible quotes for the T-WAM methodology or any
Consolidated Last Sale prices that day, the NOCP will be the prior
day's closing price as disseminated by the primary listing market that
previously listed it. For an ETP that is a new listing to Nasdaq and
does not have any eligible quotes for the T-WAM methodology or any
Consolidated Last Sale prices that day, the NOCP will not be
disseminated.
The proposed functionality in this filing is similar to
functionality that has already been approved by the Commission and is
operational on other exchanges. The Exchange believes that the proposed
pricing methodology will promote just and equitable principles of
trade, remove impediments to, and perfect the mechanisms of, a free and
open market and a national market system and, in general, protect
investors and the public interest by enhancing how the NOCP will be
determined for a Nasdaq-listed security that is an ETP and will be to
the benefit of issuers, traders, and investors alike.
For the above reasons, the Exchange believes that the proposal is
consistent
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with the requirements of Section 6(b)(5) of the Act.
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, as amended. The proposed rule
change is consistent with the rules of the other exchanges and is
designed to provide for how the Exchange would determine the NOCP for
an Exchange-listed security that is an ETP if there is no Closing
Cross, which will help it better compete as a listing venue.
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-2019-061 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-2019-061. 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 a.m. and 3
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-2019-061, and should be submitted
on or before September 13, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18166 Filed 8-22-19; 8:45 am]
BILLING CODE 8011-01-P