[Federal Register Volume 85, Number 247 (Wednesday, December 23, 2020)]
[Notices]
[Pages 84084-84087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28304]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90697; File No. SR-NASDAQ-2020-089]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
No Longer Implement the OTTO Protocol

December 17, 2020.
    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 December 15, 2020, 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, II, 
and III 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 remove the protocol ``Ouch to Trade 
Options'' or ``OTTO'' from The Nasdaq Options Market LLC (``NOM'') 
Rulebook. The Exchange previously delayed its implementation of the 
OTTO protocol; the Exchange will no longer implement the OTTO protocol.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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
    NOM's proposal seeks to remove the protocol ``Ouch to Trade 
Options'' or ``OTTO'' from The Nasdaq Options Market LLC (``NOM'') 
Rulebook. The Exchange previously delayed its implementation of the 
OTTO protocol; the Exchange will no longer implement the OTTO protocol.
Background
    Nasdaq filed a rule change \3\ which adopted a new protocol ``Ouch 
to Trade Options'' or ``OTTO'' \4\ and proposed to rename and modify 
the current OTTO protocol as ``Quote Using Orders'' or ``QUO.'' \5\ The 
Exchange subsequently filed a rule change to amend Options 3, Section 
18, titled ``Detection of Loss of Communication'' which describes the 
impact to NOM protocols in the event of a loss of a communication. The 
Exchange accounted for both the new OTTO and renamed and modified QUO 
within this rule. Similarly, the Exchange amended Options 3, Section 8, 
``Nasdaq Opening and Halt Cross'' to account for the new OTTO and 
renamed and modified QUO within this rule. Finally, the Exchange 
amended Options 3, Section 23, ``Data Feeds and Trade Information'' to 
amend ``OTTO DROP'' to ``QUO DROP'' and noted within Options 3, Section 
15(a)(1) related to Order Price Protection rule or ``OPP''

[[Page 84085]]

that OPP shall not apply to orders entered through QUO.\6\
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    \3\ See Securities Exchange Act Release No. 83888 (August 20, 
2018), 83 FR 42954 (August 24, 2018) (SR-NASDAQ-2018-069) (``Prior 
Rule Change''). In the Prior Rule Change the Exchange stated that it 
would issue an Options Trader Alert introducing the new OTTO 
protocol in Q4 of 2018. The rule numbers were amended in 2019 when 
the Rulebook was relocated. See Securities Exchange Act Release No. 
87778 (December 17, 2019), 84 FR 70590 (December 23, 2019) (SR-
NASDAQ-2019-098).
    \4\ As modified by the Prior Rule Change, OTTO is an interface 
that allows Participants and their Sponsored Customers to connect, 
send, and receive messages related to orders to and from the 
Exchange. Features include the following: (1) Options symbol 
directory messages (e.g., underlying); (2) system event messages 
(e.g., start of trading hours messages and start of opening); (3) 
trading action messages (e.g., halts and resumes); (4) execution 
messages; (5) order messages; and (6) risk protection triggers and 
cancel notifications. See NOM Rules at Options 3, Section 
7(d)(1)(C).
    \5\ QUO is an interface that allows NOM Market Makers to 
connect, send, and receive messages related to single-sided orders 
to and from the Exchange. Order Features include the following: (1) 
Options symbol directory messages (e.g., underlying); (2) system 
event messages (e.g., start of trading hours messages and start of 
opening); (3) trading action messages (e.g., halts and resumes); (4) 
execution messages; (5) order messages; and (6) risk protection 
triggers and cancel notifications. Orders submitted by NOM Market 
Makers over this interface are treated as quotes. See Options 3, 
Section 7(d)(1)(D).
    \6\ See Securities Exchange Act Release No. 84559 (November 9, 
2018), 83 FR 57774 (November 16, 2018) (SR-NASDAQ-2018-085) 
(``Subsequent Rule Change'').
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    Both the Prior Rule Change and the Subsequent Rule Change indicated 
the aforementioned rule changes would be implemented for QUO and OTTO 
in Q4 of 2018 with the date announced via an Options Traders Alert. The 
Exchange filed a rule change implementing QUO and delaying the 
introduction of the OTTO functionality until Q3 2019 by announcing the 
date of implementation via an Options Traders Alert.\7\ The Exchange 
further delayed the implementation of OTTO functionality until Q3 2019 
and then Q2 2020, respectively.\8\ The last rule change filed with the 
Commission delayed the implementation of OTTO functionality until Q2 
2021 due to market events.\9\
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    \7\ See Securities Exchange Act Release No. 84723 (December 4, 
2018), 83 FR 63692 (December 11, 2018) (SR-NASDAQ-2018-097). The 
Exchange proposed to immediately implement QUO as of the 
effectiveness of SR-NASDAQ-2018-097 and delay the implementation of 
OTTO by issuing an Options Trader Alert announcing the 
implementation date in Q1 2019. The QUO implementation became 
effective upon filing on November 26, 2018.
    \8\ See Securities Exchange Act Release Nos. 85386 (March 21, 
2019), 84 FR 11597 (March 27, 2019) (SR-NASDAQ-2019-016); and 87160 
(September 30, 2019), 84 FR 53186 (October 4, 2019) (SR-NASDAQ-2019-
078).
    \9\ See Securities Exchange Act Release Nos. 89077 (June 16, 
2020), 85 FR 37486 (June 22, 2020) (SR-NASDAQ-2020-031).
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Proposal
    At this time, NOM has determined not to implement the OTTO protocol 
and proposes to remove references to the OTTO protocol within its 
Rulebook. As noted above, the Exchange delayed the introduction of the 
OTTO functionality initially until Q3 2019.\10\ The Exchange then 
further delayed the implementation of OTTO functionality until Q3 2019 
and then Q2 2020, respectively.\11\ There were not a material amount of 
non-Market Makers interested in the risk enhancements or the OTTO 
protocol after the first two delays. The last rule change filed with 
the Commission delayed the implementation of OTTO functionality until 
Q2 2021 due to market events.\12\ Nasdaq was considering enhancing OTTO 
features to provide Participants with other capabilities that are 
currently not offered with OTTO, in the area of risk enhancements.\13\ 
Nasdaq has discussed certain enhancements with Participants. The 
Exchange notes that it did not have a large number of Participants 
interested in the enhancements it was considering.
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    \10\ See Securities Exchange Act Release No. 84723 (December 4, 
2018), 83 FR 63692 (December 11, 2018) (SR-NASDAQ-2018-097). The 
Exchange proposed to immediately implement QUO as of the 
effectiveness of SR-NASDAQ-2018-097 and delay the implementation of 
OTTO by issuing an Options Trader Alert announcing the 
implementation date in Q1 2019. The QUO implementation became 
effective upon filing on November 26, 2018.
    \11\ See Securities Exchange Act Release Nos. 85386 (March 21, 
2019), 84 FR 11597 (March 27, 2019) (SR-NASDAQ-2019-016); and 87160 
(September 30, 2019), 84 FR 53186 (October 4, 2019) (SR-NASDAQ-2019-
078).
    \12\ See Securities Exchange Act Release Nos. 89077 (June 16, 
2020), 85 FR 37486 (June 22, 2020) (SR-NASDAQ-2020-031).
    \13\ Of those firms interested in the OTTO protocol in 2018, a 
very low number of firms were non-market making firms. As noted in 
the Prior Rule Change, the former OTTO protocol was predominately 
utilized by NOM Market Makers.
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    There are differences as between the current order entry FIX 
offering and the delayed OTTO offering. The OTTO offering included 
options symbol directory messages (e.g., underlying); system event 
messages (e.g., start of trading hours messages and start of opening); 
and trading action messages (e.g., halts and resumes). The options 
symbol directory messages,\14\ system event messages and trading action 
messages may also be obtained through market data feeds offered by the 
Exchange.\15\ Also, OTTO would not offer the ability to route, unlike 
FIX which does offer the ability to route orders.
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    \14\ Further, FIX permits Participants to define their orders 
utilizing industry-wide canonical information (e.g. underlying, put/
call and strike information) as compared to OTTO which would require 
a Participant to read symbol directory messages and send orders with 
Exchange specific instrument IDs.
    \15\ See Options 3, Section 23 for descriptions of the Nasdaq 
ITCH to Trade Options (``ITTO'') and Best of Nasdaq Options 
(``BONO'') data feeds. System event messages (e.g., start of trading 
hours messages and start of opening); and trading action messages 
(e.g., halts and resumes) are available on both of these data feeds.
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    The Exchange notes that other Nasdaq markets offer only one order 
entry protocol.\16\ Both Phlx and BX offer only one quoting protocol, 
SQF, on those markets.
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    \16\ Nasdaq Phlx LLC (``Phlx'') and Nasdaq BX, Inc. (``BX'') 
only offer the FIX protocol for order entry.
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    At this time, in light of conversations with Participants, Nasdaq 
proposes to remove the OTTO protocol from its Rulebook and not 
implement this protocol. NOM will continue to offer QUO, in addition to 
its FIX \17\ and SQF \18\ protocols. The Exchange proposes to make 
conforming changes to the Rulebook to eliminate references to OTTO.
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    \17\ ``Financial Information eXchange'' or ``FIX'' is an 
interface that allows Participants and their Sponsored Customers to 
connect, send, and receive messages related to orders to and from 
the Exchange. Features include the following: (1) Execution 
messages; (2) order messages; and (3) risk protection triggers and 
cancel notifications. See Options 3, Section 7(d)(1)(A).
    \18\ ``Specialized Quote Feed'' or ``SQF'' is an interface that 
allows Market Makers to connect, send, and receive messages related 
to quotes and Immediate-or- Cancel Orders into and from the 
Exchange. Features include the following: (1) Options symbol 
directory messages (e.g underlying instruments); (2) system event 
messages (e.g., start of trading hours messages and start of 
opening); (3) trading action messages (e.g., halts and resumes); (4) 
execution messages; (5) quote messages; (6) Immediate-or-Cancel 
Order messages; (7) risk protection triggers and purge 
notifications; and (8) opening imbalance messages. The SQF Purge 
Interface only receives and notifies of purge request from the 
Market Maker. Market Makers may only enter interest into SQF in 
their assigned options series. See Options 3, Section 7(d)(1)(B).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\20\ 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. While the Exchange will no longer implement the OTTO 
functionality, it will continue to offer the FIX, QUO, and SQF 
protocols on NOM.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    As noted above, the Exchange delayed the introduction of the OTTO 
functionality initially until Q3 2019.\21\ The Exchange then further 
delayed the implementation of OTTO functionality until Q3 2019 and then 
Q2 2020, respectively.\22\ There were not a material amount of non-
Market Makers interested in the risk enhancements or the OTTO protocol 
after the first two delays. The last rule change filed with the 
Commission delayed the implementation of OTTO functionality until Q2 
2021 due to market events.\23\ Nasdaq was considering enhancing OTTO 
features to provide Participants with other capabilities that are 
currently not offered with OTTO, in the area of

[[Page 84086]]

risk enhancements.\24\ Nasdaq has discussed certain enhancements with 
Participants.\25\ The Exchange notes that it did not have a large 
number of Participants interested in the enhancements it was 
considering. At this time, in light of conversations with Participants, 
Nasdaq proposes to remove the OTTO protocol from its Rulebook and not 
implement this protocol.
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    \21\ See Securities Exchange Act Release No. 84723 (December 4, 
2018), 83 FR 63692 (December 11, 2018) (SR-NASDAQ-2018-097). The 
Exchange proposed to immediately implement QUO as of the 
effectiveness of SR-NASDAQ-2018-097 and delay the implementation of 
OTTO by issuing an Options Trader Alert announcing the 
implementation date in Q1 2019. The QUO implementation became 
effective upon filing on November 26, 2018.
    \22\ See Securities Exchange Act Release Nos. 85386 (March 21, 
2019), 84 FR 11597 (March 27, 2019) (SR-NASDAQ-2019-016); and 87160 
(September 30, 2019), 84 FR 53186 (October 4, 2019) (SR-NASDAQ-2019-
078).
    \23\ See Securities Exchange Act Release Nos. 89077 (June 16, 
2020), 85 FR 37486 (June 22, 2020) (SR-NASDAQ-2020-031).
    \24\ Of those firms interested in the OTTO protocol in 2018, a 
very low number of firms were non-market making firms. As noted in 
the Prior Rule Change, the former OTTO protocol was predominately 
utilized by NOM Market Makers.
    \25\ The Exchange notes that it did not have a large number of 
Participants interested in the enhancements it was considering.
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    As noted in the Prior Rule Change, the former OTTO protocol was 
predominately utilized by NOM Market Makers. NOM Market Makers may 
elect to utilize either the SQF or QUO \26\ quoting protocols to quote 
on NOM. NOM Market Makers may enter orders to the extent they do not 
exceed 25 percent of the total number of all contracts executed by the 
Market Maker in any calendar quarter in options in which the NOM Market 
Maker is not registered as a Market Maker.\27\ As Market Makers 
primarily make markets on NOM, utilizing the quoting protocols, the FIX 
offering is primarily utilized for non-market making activities by NOM 
Market Makers. Further, all NOM Participants have utilized FIX since 
the inception of NOM to enter orders. The differences as between the 
current order entry FIX offering and the delayed OTTO offering are not 
impactful in that the options symbol directory messages (e.g., 
underlying); \28\ system event messages (e.g., start of trading hours 
messages and start of opening); and trading action messages (e.g., 
halts and resumes) may also be obtained through market data feeds 
offered by the Exchange.\29\ Today, NOM Participants subscribe to the 
market data feeds to obtain order book information. Finally, unlike 
FIX, OTTO would not offer the ability to route to away markets. The 
Exchange notes that other Nasdaq markets offer only one order entry 
protocol.\30\ Both Phlx and BX offer only one quoting protocol, SQF, on 
those markets.
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    \26\ Orders that NOM Market Makers send through QUO count toward 
market maker quoting obligations.
    \27\ See Options 2, Section 6(b).
    \28\ Further, FIX permits Participants to define their orders 
utilizing industry-wide canonical information (e.g. underlying, put/
call and strike information) as compared to OTTO which would require 
a Participant to read symbol directory messages and send orders with 
Exchange specific instrument IDs.
    \29\ See Options 3, Section 23 for descriptions of the ITTO and 
BONO data feeds.
    \30\ See note 16 above.
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    Nasdaq will continue its conversations with Participants to 
understand Participant needs so that it may continue to consider 
changes to protocols offered on NOM in the future.

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. With this proposal, the 
Exchange will not implement the OTTO protocol to any NOM Participant. 
Any Participant may utilize the FIX protocol for order entry on NOM. 
The Exchange does not believe the proposal imposes an undue burden on 
intra-market competition. There were not a material amount of non-
Market Makers interested in the risk enhancements or the OTTO protocol 
after the first two delays.
    As noted in the Prior Rule Change, the former OTTO protocol was 
predominately utilized by NOM Market Makers. Non-Market Makers could 
have elected to utilize OTTO, however it would not offer routing 
capabilities. While NOM Market Makers may elect to utilize either the 
SQF or the QUO \31\ quoting protocol, non-Market Makers must utilize 
the FIX protocol. NOM Market Makers, unlike other market participants, 
are required to provide liquidity to the market and are subject to 
certain obligations,\32\ including a requirement to provide continuous 
two-sided quotes on a daily basis.\33\ Providing multiple protocols for 
NOM Market Makers to provide liquidity on NOM benefits all market 
participants through the quality of order interaction.
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    \31\ Orders that NOM Market Makers send through QUO count toward 
market maker quoting obligations.
    \32\ See Options 2, Section 4.
    \33\ See Options 2, Section 5.
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    The Exchange does not believe the proposal imposes an undue burden 
on inter-market competition because the protocols described herein 
permit market participants to enter quotes and orders on NOM. Other 
options exchanges may similarly develop protocols specific to order and 
quote entry on their markets which are similar to the offerings on NOM. 
The Exchange notes that other Nasdaq markets offer only one order entry 
protocol.\34\ Both Phlx and BX offer only one quoting protocol, SQF, on 
those markets. Further, today, all options markets utilize the FIX 
protocol for order entry.
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    \34\ See note 16 above.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \35\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\36\
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    \35\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \36\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-2020-089 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-2020-089. This

[[Page 84087]]

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-2020-089 and should be submitted 
on or before January 13, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28304 Filed 12-22-20; 8:45 am]
BILLING CODE 0811-01-P