[Federal Register Volume 87, Number 55 (Tuesday, March 22, 2022)]
[Notices]
[Pages 16279-16280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-05979]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94431; File No. SR-NASDAQ-2022-006]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Approving Proposed Rule Change To Enable Exchange Participants To Enter
Midpoint Extended Life Orders and M-ELO Plus Continuous Book Orders
With an Immediate-or-Cancel Time-in-Force Instruction
March 16, 2022.
I. Introduction
On January 19, 2022, 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 enable Exchange participants to enter Midpoint
Extended Life Orders (``M-ELOs'') and M-ELO Plus Continuous Book Orders
(``M-ELO+CBs'') with an immediate-or-cancel (``IOC'') Time-in-Force
(``TIF'') instruction. The proposed rule change was published for
comment in the Federal Register on February 2, 2022.\3\ The Commission
has not received any comment letters on the proposed rule change. This
order approves the proposed rule change.
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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. 94076 (January 27,
2022), 87 FR 5926 (``Notice'').
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II. Description of the Proposal
M-ELO is an order type with a non-display order attribute that is
priced at the midpoint between the national best bid and national best
offer (``NBBO'') and that will not be eligible to execute until a
holding period of 10 milliseconds (``Holding Period'') has passed after
acceptance of the order by the Exchange system.\4\ Once a M-ELO becomes
eligible to execute, the order may only execute against other eligible
M-ELOs and M-ELO+CBs.\5\
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\4\ See Nasdaq Equity 4, Rule (``Rule'') 4702(b)(14).
\5\ See id.
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M-ELO+CB is an order type that has all of the characteristics and
attributes of a M-ELO, except that after satisfying its Holding Period,
in addition to executing against other eligible M-ELO+CBs and M-ELOs,
it may also execute against certain orders on the Exchange's continuous
book.\6\ Specifically, a M-ELO+CB may also execute 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; (2) the Midpoint Order has rested on the
continuous book for at least 10 milliseconds after the NBBO midpoint
falls within the limit price set by the participant; (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.\7\
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\6\ See Nasdaq Rule 4702(b)(15).
\7\ See id.
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Currently, M-ELOs and M-ELO+CBs may not be entered with a TIF of
IOC.\8\ The Exchange now proposes to amend Nasdaq Rule 4702(b)(14) to
enable Exchange participants to enter M-ELOs and M-ELO+CBs with an IOC
instruction.\9\ As proposed, if a M-ELO or M-ELO+CB is entered with a
TIF of IOC, it would execute against eligible resting interest
immediately upon the expiration of the Holding Period.\10\ If no
eligible resting interest is available, or shares of the order remain
unexecuted after trading against available eligible resting interest,
then the system would automatically cancel the order or the remaining
shares of the order, as applicable.\11\ If the order is ineligible to
begin the Holding Period upon entry (i.e., the NBBO is crossed at the
time of order entry, there is no NBB or NBO at the time of order entry,
or the order is entered with a limit price that is not at or better
than the NBBO midpoint), then the system would cancel the order
immediately.\12\
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\8\ See Nasdaq Rule 4702(b)(14)(B), (b)(15). An order with a TIF
of IOC is one that is designated to deactivate immediately after
determining whether the order is marketable. See Nasdaq Rule
4703(a)(1).
\9\ See proposed Nasdaq Rule 4702(b)(14)(B). Because Nasdaq Rule
4702(b)(15) incorporates by reference the M-ELO characteristics and
attributes set forth in Nasdaq Rule 4702(b)(14), the proposed rule
change would also allow M-ELO+CBs to be entered with a TIF of IOC.
\10\ See proposed Nasdaq Rule 4702(b)(14)(B).
\11\ See id.
\12\ See id.; Notice, supra note 3, at 5928.
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As proposed, M-ELOs and M-ELO+CBs with a TIF of IOC would be
subject to real-time surveillance to determine if they are being abused
by
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market participants.\13\ Moreover, as is the case for all other M-ELOs
and M-ELO+CBs, the Exchange would monitor the use of M-ELOs and M-
ELO+CBs with a TIF of IOC, with the intent to apply additional
measures, as necessary, to ensure that their usage is appropriately
tied to the intent of the order types.\14\ The Exchange states that it
is committed to determining whether there is opportunity or prevalence
of behavior that is inconsistent with normal risk management behavior,
such as excessive cancellations.\15\ 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 M-ELOs or M-
ELO+CBs may be subject to penalties or other participant requirements
to discourage such behavior, should it occur.\16\
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\13\ See Notice, supra note 3, at 5928.
\14\ See id.
\15\ See id.
\16\ See id.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\17\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\18\ 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.
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\17\ 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).
\18\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed IOC functionality could
make the use of M-ELOs and M-ELO+CBs more efficient for Exchange
participants that choose to use these order types.\19\ In particular,
the proposed functionality could be attractive to Exchange participants
that wish to enhance the efficiency of their decision-making process
regarding whether to send additional M-ELOs or M-ELO+CBs to the
Exchange or to seek liquidity elsewhere.\20\ The proposed functionality
could also enhance efficiency for Exchange participants that submit M-
ELOs or M-ELO+CBs that do not satisfy the conditions for a Holding
Period to commence upon order entry, because it would allow these
orders to be cancelled immediately rather than be held by the system
until such time as the conditions are met, and therefore allow these
participants to more quickly assess whether they wish to submit new M-
ELOs or M-ELO+CBs that would satisfy the conditions to commence a
Holding Period upon entry.\21\ Moreover, because M-ELOs and M-ELO+CBs
are optional order types, if certain Exchange participants determine
that the proposal would make these order types less attractive for
their particular investment objectives, these participants may elect to
reduce or eliminate their use of these order types.
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\19\ The Exchange states that institutional investors have
approached the Exchange recently to request the ability to enter IOC
instructions for M-ELOs and M-ELO+CBs. See Notice, supra note 3, at
5927. The Exchange also understands that some participants
representing institutional investor orders have developed methods
that mimic the functions of IOC. See id. at 5927 n.10.
\20\ See id. at 5927.
\21\ See id.
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In its original order approving M-ELO on the Exchange, the
Commission stated 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.\22\ In its order approving M-ELO+CB, the Commission
stated its belief that, as with M-ELOs, M-ELO+CBs represent a
reasonable effort to further enhance the ability of longer-term trading
interest to participate effectively on an exchange.\23\
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\22\ See Securities Exchange Act Release No. 82825 (March 7,
2018), 83 FR 10937, 10938-39 (March 13, 2018) (order approving SR-
NASDAQ-2017-074). The Commission also stated that the M-ELO order
type is intended to provide additional execution opportunities on
the Exchange for market participants that may not be as sensitive to
very short-term changes in the NBBO and are willing to wait a
prescribed period of time following their order submission to
receive a potential execution against other market participants that
have similarly elected to forgo an immediate execution. See id. at
10940. In addition, the Commission stated that the M-ELO order type
is intended to mitigate the risk that an opportunistic low-latency
trader will be able to execute against a member's order at a time
that is disadvantageous to the member, such as just prior to a
change in the NBBO. See id.
\23\ See Securities Exchange Act Release No. 86938 (September
11, 2019), 84 FR 48978, 48980-81 (September 17, 2019) (order
approving SR-NASDAQ-2019-048).
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The Commission believes that the proposed IOC functionality for M-
ELOs and M-ELO+CBs would not undermine the original intent of these
order types. As proposed, these order types would continue to be
available to market participants that are willing to wait a prescribed
period of time following their order submission to receive a potential
execution against other market participants that have similarly elected
to forgo an immediate execution. As described above, the IOC
instruction would activate only at the expiration of the Holding
Period, rather than immediately upon order entry. In addition, while M-
ELOs and M-ELO+CBs with an IOC instruction would be cancelled
immediately upon entry if they do not meet the conditions to start the
Holding Period at the time of entry, such cancellation would not depend
on the availability of eligible resting interest on the Exchange, and
therefore would not provide any indication of the availability of such
interest on the Exchange. Finally, as described above, the Exchange
will continue to conduct real-time surveillance and monitor the use of
M-ELOs and M-ELO+CBs, including those with a TIF of IOC, to determine
whether these order types are being abused by market participants and
whether their usage is appropriately tied to the intent of the order
types.\24\
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\24\ See supra notes 13-16 and accompanying text.
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Based on the foregoing, the Commission finds that the proposed rule
change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-NASDAQ-2022-006) be, and
hereby is, approved.
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\25\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05979 Filed 3-21-22; 8:45 am]
BILLING CODE 8011-01-P