[Federal Register Volume 84, Number 180 (Tuesday, September 17, 2019)]
[Notices]
[Pages 48978-48981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20018]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86938; File No. SR-NASDAQ-2019-048]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment Nos. 2 and 3 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 2 and 3, To Establish the ``Midpoint Extended Life Order
+ Continuous Book'' as a New Order Type
September 11, 2019.
I. Introduction
On May 29, 2019, The Nasdaq Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to establish the Midpoint Extended Life Order +
Continuous Book (``M-ELO+CB'') as a new order type. The proposed rule
change was published for comment in the Federal Register on June 17,
2019.\3\ On July 1, 2019, the Exchange filed Amendment No. 1 to the
proposed rule change, which amended and superseded the proposed rule
change as originally filed. On July 30, 2019, pursuant to Section
19(b)(2) of the Act,\4\ the Commission designated a longer period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\5\ On July 31, 2019, the
[[Page 48979]]
Exchange filed Amendment No. 2 to the proposed rule change, which
amended and superseded the proposed rule change, as modified by
Amendment No. 1.\6\ On August 30, 2019, the Exchange filed Amendment
No. 3 to the proposed rule change.\7\ The Commission received no
comment letters on the proposed rule change. The Commission is
publishing this notice to solicit comments on Amendment Nos. 2 and 3
from interested persons, and is approving the proposed rule change, as
modified by Amendment Nos. 2 and 3, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86083 (June 11,
2019), 84 FR 28107.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 86512, 84 FR 38078
(August 5, 2019). The Commission designated September 15, 2019 as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ In Amendment No. 2, the Exchange revised the proposal to:
(1) Explain in greater detail the order entry protocols available
for M-ELO+CBs; (2) provide additional specificity about the resting
period for midpoint orders; (3) provide additional specificity about
the execution priority of M-ELO+CBs, M-ELOs, and midpoint orders;
(4) conform the proposal to a recently approved proposed rule change
permitting M-ELOs to be entered in odd-lot sizes; (5) specify that
any punitive fees or participant requirements determined to be
necessary by the Exchange for M-ELO+CB usage would be implemented
pursuant to a future proposed rule change; and (6) make technical,
clarifying, and conforming changes. Amendment No. 2 is available at
https://www.sec.gov/comments/sr-nasdaq-2019-048/srnasdaq2019048-5898749-188829.pdf.
\7\ In Amendment No. 3, the Exchange further revised the
proposal to: (1) Clarify that the statistical information it
proposes to publish for M-ELO+CBs would be aggregated with the
statistical information it currently publishes for M-ELOs; (2)
clarify the circumstances in which modification of a M-ELO+CB or
midpoint order would trigger a new holding or resting period; and
(3) make technical and conforming changes. Amendment No. 3 is
available at https://www.sec.gov/comments/sr-nasdaq-2019-048/srnasdaq2019048-6049836-191368.pdf.
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II. Description of the Proposal
Currently, the Exchange offers the Midpoint Extended Life Order
(``M-ELO'').\8\ A M-ELO is a non-displayed order priced at the midpoint
between the National Best Bid and National Best Offer (``NBBO'') that
is not eligible for execution until it completes a one-half second
holding period (``Holding Period'').\9\ Once eligible to trade, M-ELOs
may only execute against other M-ELOs.\10\
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\8\ See Rule 4702(b)(14)(A). See also Securities Exchange Act
Release No. 82825 (March 7, 2018), 83 FR 10937 (March 13, 2018)
(``Original M-ELO Approval Order'') (order approving SR-NASDAQ-2017-
074).
\9\ See Rule 4702(b)(14)(A).
\10\ See id.
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The Exchange now proposes to adopt M-ELO+CB as a variation on the
M-ELO concept. That is, a M-ELO+CB would be an order type that has all
of the characteristics and attributes of a M-ELO, except that, in
addition to executing against other M-ELO+CBs and M-ELOs, it would also
be able to execute against certain ``M-ELO-like'' orders on the
Exchange's continuous book.\11\ Specifically, a M-ELO+CB would be
subject to the same one-half second Holding Period as a M-ELO. A M-
ELO+CB that satisfies the Holding Period would be eligible to execute,
at the NBBO midpoint, against other eligible M-ELO+CBs and eligible M-
ELOs.\12\ However, unlike a M-ELO, the M-ELO+CB would also be eligible
to execute, at the NBBO midpoint, against non-displayed orders with
midpoint pegging and midpoint peg post-only orders (collectively,
``Midpoint Orders'') resting on the Exchange's continuous book, if: (1)
The Midpoint Order has the midpoint trade now order attribute enabled;
\13\ (2) the Midpoint Order has rested on the continuous book for at
least one-half second after the NBBO midpoint falls within the limit
price set by the participant; \14\ (3) no other order is resting on the
continuous book that has a more aggressive price than the current NBBO
midpoint; and (4) the Midpoint Order satisfies any minimum quantity
requirement of the M-ELO+CB.\15\ A buy (sell) M-ELO+CB would be ranked
in time order at the NBBO midpoint among other buy (sell) M-ELO+CBs,
buy (sell) M-ELOs, and buy (sell) Midpoint Orders, as of the time when
such orders become eligible to execute (i.e., the time at which they
exit their respective one-half second Holding Periods or resting
periods, as applicable, and satisfy any other conditions for
marketability).\16\
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\11\ See proposed Rule 4702(b)(15). Also, unlike M-ELOs, M-
ELO+CBs may be entered via any of the Exchange's order entry
protocols except for QIX. See id.; Amendment No. 2, supra note 6, at
5 n.6, 7. The type of protocol used would not affect how the system
handles M-ELO+CBs. See Amendment No. 2, supra note 6, at 7.
\12\ See proposed Rule 4702(b)(15).
\13\ The midpoint trade now order attribute currently 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 locking midpoint peg post-only order, as a liquidity taker. See
Rule 4703(n). The Exchange proposes to amend the midpoint trade now
order attribute to provide that, in addition to the functionality
the attribute currently provides, enabling the attribute would also
permit a Midpoint Order to execute against a M-ELO+CB, provided that
the Midpoint Order meets the eligibility requirements for doing so.
See proposed Rule 4703(n). The Exchange also proposes to specify
that, if there is a resting Midpoint Order on the Nasdaq book
without the midpoint trade now order attribute, a new incoming
Midpoint Order with the midpoint trade now order attribute will be
able to execute against a M-ELO+CB (after meeting the eligibility
requirements). See id. The resting Midpoint Order without the
midpoint trade now order attribute will thereafter remain on the
Nasdaq book and retain its priority relative to other resting orders
on the same side of the market. See id.
\14\ If a Midpoint Order with the midpoint trade now order
attribute enabled is modified during its resting period or after its
resting 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, such modification would trigger a new resting period for the
Midpoint Order. See Amendment No. 3, supra note 7, at 4.
\15\ See proposed Rule 4702(b)(15).
\16\ See id.; Amendment No. 2, supra note 6, at 6.
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In all other respects, a M-ELO+CB would be identical to a M-ELO.
For example, 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 price set by the participant; or (2)
held until the midpoint falls within the limit price 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.\17\ 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.\18\ 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) after it is
eligible to execute, the order would have to satisfy a new Holding
Period to become eligible to execute. If the NBBO changes while a M-
ELO+CB is in the Holding Period, the Holding Period would not reset,
even if, as a result of the NBBO change, the M-ELO+CB's limit price is
less aggressive than the NBBO midpoint.\19\ If a M-ELO+CB satisfies the
Holding Period, but the NBBO midpoint is no longer within its limit, it
would nonetheless be ranked in time priority among other M-ELO+CBs, M-
ELOs, and Midpoint Orders if the NBBO later moves such that the
midpoint is within the order's limit price (i.e., the Holding Period
would not reset).\20\
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\17\ See Amendment No. 2, supra note 6, at 6-7.
\18\ See id. at 7.
\19\ See id.
\20\ See id.
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If there is no National Best Bid or National Best Offer, the
Exchange would accept M-ELO+CBs but would not allow M-ELO+CB executions
until there is an NBBO.\21\ M-ELO+CBs would be eligible to execute if
the NBBO is locked.\22\ If the NBBO is crossed, M-ELO+CBs would be held
by the system until the NBBO is no longer crossed, at which time they
would be eligible to
[[Page 48980]]
trade.\23\ M-ELO+CBs may be cancelled at any time, including during the
Holding Period.\24\
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\21\ See id.
\22\ See id.
\23\ See id.
\24\ See id.
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M-ELO+CBs would only be active during market hours.\25\
Specifically, M-ELO+CBs entered during pre-market hours would be held
by the system in time priority until market hours begin, 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. Eastern time would
be cancelled by the system.\26\ M-ELO+CBs would not be eligible for the
Exchange's opening, halt, and closing crosses.\27\ M-ELO+CBs may be
entered in any size and may have a minimum quantity order
attribute.\28\ M-ELO+CBs may not be designated with a time-in-force of
immediate or cancel, are ineligible for routing, and may not have the
discretion, reserve size, attribution, intermarket sweep order,
display, trade now, or midpoint trade now order attributes.\29\
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\25\ See id.
\26\ See id. at 7-8.
\27\ See proposed Rule 4703(l).
\28\ See Amendment No. 2, supra note 6, at 8. See also
Securities Exchange Act Release No. 86416 (July 19, 2019), 84 FR
35918 (July 25, 2019) (order approving SR-NASDAQ-2019-044 to allow
M-ELOs to be odd lot-sized).
\29\ See Amendment No. 2, supra note 6, at 8.
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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.\30\ 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.\31\ Specifically, the Exchange would include M-
ELO+CB executions in the existing reports it publishes on
Nasdaqtrader.com that provide weekly aggregated statistics showing the
number of shares and transactions of M-ELOs executed on the Exchange by
security.\32\ The Exchange would also include M-ELO+CB executions in
the existing reports it publishes on Nasdaqtrader.com that provide
monthly aggregated block-sized trading statistics of total shares and
total transactions of M-ELOs executed on the Exchange.\33\
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\30\ See id.
\31\ See id.
\32\ See id.; Amendment No. 3, supra note 7, at 5, 8 (clarifying
that the weekly statistical information published by the Exchange
would aggregate both M-ELO and M-ELO+CB executions). 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. See Amendment No. 2, supra note 6, at 8.
\33\ See Amendment No. 2, supra note 6, at 8-9; Amendment No. 3,
supra note 7, at 5, 8 (clarifying that the monthly statistical
information published by the Exchange would aggregate both M-ELO and
M-ELO+CB executions). 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. See Amendment No. 2, supra note 6, at
9. This information would be published no earlier than one month
following the end of the month for which trading was aggregated. See
id.
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The Exchange represents that, as part of the surveillance it
currently performs, M-ELO+CBs would be subject to real-time
surveillance to determine if they are being abused by market
participants.\34\ In addition, as is the case for M-ELOs, the Exchange
represents that it 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.\35\ According to
the Exchange, 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.\36\
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\34\ See Amendment No. 2, supra note 6, at 9.
\35\ See id. The Exchange states that 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. See id.
\36\ See id. Should the Exchange determine that they are
necessary to maintain a fair and orderly market, any punitive fees
or other participant requirements tied to M-ELO+CB usage would be
implemented by rule filing under Section 19(b) of the Act. See id.
at 9 n.11.
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The Exchange plans to implement M-ELO+CB within thirty days after
its approval, and will announce the specific implementation date by
Equity Trader Alert.\37\ The Exchange states that it will make M-ELO+CB
available to all members and to all securities upon implementation.\38\
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\37\ See id. at 11. The Exchange notes that it plans to propose
a fee structure for M-ELO+CB in a subsequent proposed rule change.
See id. at 11 n.13.
\38\ See id. at 11.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment Nos. 2 and 3, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\39\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\40\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, 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, and that the rules are not designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers; and Section 6(b)(8) of the Act,\41\ which requires that the
rules of a national securities exchange not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
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\39\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\40\ 15 U.S.C. 78f(b)(5).
\41\ 15 U.S.C. 78f(b)(8).
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The Commission has carefully considered the proposal and finds that
it is consistent with the Act. In its original order approving M-ELO on
the Exchange, the Commission noted its belief that the M-ELO order type
could create additional and more efficient trading opportunities on the
Exchange for investors with longer investment time horizons, including
institutional investors, and could provide these investors with an
ability to limit the information leakage and the market impact that
could result from their orders.\42\ While M-ELOs are currently limited
to executing only against other M-ELOs, the Commission believes that
the Exchange's proposal to introduce M-ELO+CBs, which would be able to
interact with eligible Midpoint Orders, in addition to M-ELO+CBs and M-
ELOs, could create opportunities for Exchange participants to utilize a
variation of the M-ELO order type consistent with the intended purpose
of the order type. In particular, the proposal would provide Exchange
participants with the flexibility to allow their orders to interact
with ``M-ELO-like'' interest on the Exchange's order book. As with M-
ELOs, the Commission believes that M-ELO+CBs represent a reasonable
effort to further enhance the
[[Page 48981]]
ability of longer-term trading interest to participate effectively on
an exchange.
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\42\ See Original M-ELO Approval Order, supra note 8, at 10938-
39.
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The Commission also believes that the proposal to use the midpoint
trade now order attribute to allow Midpoint Orders to execute against
M-ELO+CBs would provide Exchange participants entering Midpoint Orders
with additional control over the execution of their orders,
specifically by allowing participants to choose whether to enable the
order attribute in order to execute against M-ELO+CBs.
The Commission believes that the proposal to include M-ELO+CB
executions in the Exchange's published statistics for M-ELO executions
is reasonably designed to provide additional transparency regarding M-
ELO+CB executions on the Exchange without undermining the usefulness of
the M-ELO and M-ELO+CB order types by limiting the potential
information leakage and the resulting market impact that could be
associated with non-delayed identification of individual M-ELO or M-
ELO+CB executions.
Finally, the Commission believes that the Exchange's proposed
surveillance measures are reasonably designed to deter potential
improper use of the proposed M-ELO+CB order type. In particular, the
Commission notes that the Exchange has represented that, as it does for
M-ELOs, it will conduct real-time surveillance to monitor the use of M-
ELO+CBs and ensure that such usage is appropriately tied to the intent
of the order type.\43\ The Exchange has also represented that it will
continue to evaluate whether additional measures may be necessary to
ensure that M-ELO+CBs are used in a manner consistent with the intended
purpose of the order type.\44\
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\43\ See Amendment No 2, supra note 6, at 9.
\44\ See id.
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Based on the foregoing and the Exchange's representations in its
proposal, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 2 and 3, is consistent with the Act.
IV. Solicitation of Comments on Amendment Nos. 2 and 3 to the Proposed
Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment Nos. 2 and 3 are 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 October 8, 2019.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment Nos. 2 and 3
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 2 and 3, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
Nos. 2 and 3 in the Federal Register. As discussed above, in Amendment
No. 2, the Exchange revised the proposal to: (1) Explain in greater
detail the order entry protocols available for M-ELO+CBs; (2) provide
additional specificity about the resting period for Midpoint Orders;
(3) provide additional specificity about the execution priority of M-
ELO+CBs, M-ELOs, and Midpoint Orders; (4) conform the proposal to a
recently approved proposed rule change permitting M-ELOs to be entered
in odd-lot sizes; (5) specify that any punitive fees or participant
requirements determined to be necessary by the Exchange for M-ELO+CB
usage would be implemented pursuant to a future proposed rule change;
and (6) make technical, clarifying, and conforming changes. Also as
discussed above, in Amendment No. 3, the Exchange further revised the
proposal to: (1) Clarify that the statistical information it proposes
to publish for M-ELO+CBs would be aggregated with the statistical
information it currently publishes for M-ELOs; (2) clarify the
circumstances in which modification of a M-ELO+CB or Midpoint Order
would trigger a new holding or resting period; and (3) make technical
and conforming changes. The Commission believes that Amendment Nos. 2
and 3 do not raise any novel regulatory issues or make any significant
substantive changes to the original proposal, which was subject to a
full notice and comment period during which no comments were received.
The Commission also notes that Amendment Nos. 2 and 3 provide
additional accuracy, clarity, and justification to the proposal.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\45\ to approve the proposed rule change, as
modified by Amendment Nos. 2 and 3, on an accelerated basis.
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\45\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change (SR-NASDAQ-2019-048), as
modified by Amendment Nos. 2 and 3, be, and hereby is, approved on an
accelerated basis.
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\46\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20018 Filed 9-16-19; 8:45 am]
BILLING CODE 8011-01-P