[Federal Register Volume 88, Number 168 (Thursday, August 31, 2023)]
[Notices]
[Pages 60255-60258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18777]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98225; File No. SR-NASDAQ-2023-030]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule To Delay 
Implementation of Pending Amendments to Equity 4, Rules 4120, 4702 and 
4703 and To Make Further Amendments to Rules 4702 and 4703

August 25, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 16, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``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 delay implementation of pending amendments 
to Equity 4, Rules 4120, 4702 and 4703 \3\ as well as to make further 
amendments to Rules 4702 and 4703, as described further below.
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    \3\ References herein to Nasdaq Rules in the 4000 Series shall 
mean Rules in Nasdaq Equity 4.
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    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

[[Page 60256]]

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 is in the process of introducing a new upgraded 
version of the OUCH Order entry protocol \4\ that will, when fully 
implemented, enable the Exchange to make functional improvements to 
specific Order Types \5\ and Order Attributes.\6\ The Exchange filed 
its initial proposal (the ``Proposal'') for these enhancements with the 
SEC on September 14, 2022, and in the Proposal the Exchange stated that 
its operative date would be November 14, 2022.\7\ The Exchange 
subsequently informed the Commission that it intended to delay 
implementation of the migration due to ongoing development work.\8\ The 
Exchange now wishes to inform participants that while it has commenced 
and systematically affected migration on a feature-by-feature basis, as 
described in a series of Equity Trader Alerts,\9\ the migration will 
not be complete until Q1 2024--again, due to ongoing development work. 
Until the migration is complete, the Exchange will continue to announce 
the implementation dates for the remaining new OUCH functionalities, in 
Equity Trader Alerts at least 30 days prior to implementation.
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    \4\ The OUCH Order entry protocol is a proprietary protocol that 
allows subscribers to quickly enter orders into the System and 
receive executions. OUCH accepts limit Orders from members, and if 
there are matching Orders, they will execute. Non-matching Orders 
are added to the Limit Order Book, a database of available limit 
Orders, where they are matched in price-time priority. OUCH only 
provides a method for members to send Orders and receive status 
updates on those Orders. See https://www.nasdaqtrader.com/Trader.aspx?id=OUCH.
    \5\ An ``Order Type'' is a standardized set of instructions 
associated with an Order that define how it will behave with respect 
to pricing, execution, and/or posting to the Exchange Book when 
submitted to Nasdaq. See Equity 1, Section 1(a)(7).
    \6\ An ``Order Attribute'' is a further set of variable 
instructions that may be associated with an Order to further define 
how it will behave with respect to pricing, execution, and/or 
posting to the Exchange Book when submitted to the Exchange. See id.
    \7\ See Securities Exchange Act Release No. 34-95768 (September 
14, 2022); 87 FR 57534 (September 20, 2022) (SR-Nasdaq-2022-051).
    \8\ See Securities Exchange Act Release No. 34-96341 (November 
17, 2022), 87 FR 71712 (November 22, 2022) (SR-Nasdaq-2022-065).
    \9\ See Equity Trader Alert 2023-35 (August 2, 2023) (announcing 
implementation of Midpoint Peg Order functionality), available at 
http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2023-35; Equity 
Trader Alert 2023-28 (June 22, 2023) (announcing implementation of 
Market Peg functionality), available at http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2023-28; Equity Trader Alert 2023-20 (May 9, 
2023) (announcing implementation of Primary Peg order 
functionality), available at http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2023-20; Equity Trader Alert 2023-17 (April 
27, 2023) (announcing implementation of Reserve Order 
functionality), available at http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2023-17; Equity Trader Alert 2023-6 (January 
31, 2023) (announcing implementation of Trade Now functionality); 
Equity Trader Alert 2022-96 (October 26, 2022) (announcing 
implementation delay until Q2/Q3 2023), available at http://www.nasdaqtrader.com/TraderNews.aspx?id=%20ETA2022-96.
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    Additionally, the Exchange also proposes amendments to its Rules to 
address inconsistencies between the Rule Text and observed System 
behavior as well as behavior unaccounted for in the existing and 
pending Rule text, as follows.
First Rule Change
    The first proposed rule change addresses an edge case of 
inconsistency between the Rule text and System behavior, this time 
regarding Market Maker Peg Orders.\10\ Rule 4702(b)(7)(A) states that, 
if after entry of a Market Maker Peg Order that has a displayed price 
based on the NBBO, and the NBBO subsequently shifts such that the 
displayed price of the Market Maker Peg Order to buy (sell) is equal to 
or greater (less) than the National Best Bid (or National Best Offer), 
the Market Maker Peg Order will not be subsequently repriced until a 
new reference price is established that is more aggressive than the 
displayed price of the Market Maker Peg Order. System testing revealed 
that the System does not reprice Market Maker Peg Orders in this 
scenario, but only if such Orders are in round lot sizes, whereas it 
does reprice such Orders when they are in odd lot sizes. After 
evaluation, the Exchange determined to maintain this System behavior 
and amend the Rule to conform to it. The Exchange proposes to do so 
because the existing language proscribing repricing only makes sense 
within the context of round lot Market Maker Peg Orders, which this 
scenario would set a new NBBO and when they do so, cannot reprice with 
respect to the reference price they just set. By contrast, odd lot 
Market Maker Peg Orders are ineligible to set the NBBO, and do not have 
this same problem. Accordingly, the Exchange proposes to amend Rule 
4702(b)(7)(A) to clarify that the prohibition against repricing only 
applies to Market Maker Peg Orders in odd lot sizes.
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    \10\ Pursuant to Rule 4702(b)(7)(A), a ``Market Maker Peg 
Order'' is an Order Type designed to allow a Market Maker to 
maintain a continuous two-sided quotation at a displayed price that 
is compliant with the quotation requirements for Market Makers set 
forth in Equity 2, Section 5(a)(2). The displayed price of the 
Market Maker Peg Order is set with reference to a ``Reference 
Price'' in order to keep the displayed price of the Market Maker Peg 
Order within a bounded price range. The Reference Price for a Market 
Maker Peg Order to buy (sell) is the then-current National Best Bid 
(National Best Offer) (including Nasdaq), or if no such National 
Best Bid or National Best Offer, the most recent reported last-sale 
eligible trade from the responsible single plan processor for that 
day, or if none, the previous closing price of the security as 
adjusted to reflect any corporate actions (e.g., dividends or stock 
splits) in the security.
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Second Rule Change
    The second proposed amendment addresses how the System prices a 
Market on Open Order \11\ with the Market Pegging Attribute \12\ and an 
offset assigned to it that a participant enters after the Nasdaq 
Opening Cross occurs. Rule 4702(b)(8)(B) currently provides as follows 
with respect to this scenario:
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    \11\ See Rule 4702(b)(8) (defining a ``Market on Open Order'' or 
``MOO'' as follows: ``an Order Type entered without a price that may 
be executed only during the Nasdaq Opening Cross. Subject to the 
qualifications provided below, MOO Orders may be entered between 4 
a.m. ET and immediately prior to 9:28 a.m. ET. An MOO Order may be 
cancelled or modified until immediately prior to 9:25 a.m. ET. An 
MOO Order shall execute only at the price determined by the Nasdaq 
Opening Cross.'').
    \12\ See Rule 4703(d)(8) (defining ``market pegging'' as pegging 
``with reference to the Inside Quotation on the opposite side of the 
market.'').
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    An MOO Order entered through RASH or FIX with a Time-in-Force of 
IOC and flagged to participate in the Nasdaq Opening Cross that is 
entered after the time of the Nasdaq Opening Cross will be accepted but 
will be converted into a Non-Displayed Order with a Time-in-Force of 
IOC and a price established using the Market Pegging Order Attribute 
with no offset.\13\
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    \13\ A Time-in-Force or ``TIF'' is a period of time that the 
Exchange will hold an Order for potential execution. See Rule 
4703(a). An Order with a TIF of Immediate-or-Cancel or ``IOC'' is 
designated to deactivate immediately after determining whether it is 
marketable. See id.
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    In testing System behavior, the Exchange observed that the System 
does not, in fact, operate in this manner Instead, the System 
determines the price

[[Page 60257]]

of the Order in this scenario using the offset. In evaluating whether 
to modify System behavior to match the Rule, the Exchange determined to 
retain the current System behavior because it did not see any 
reasonable basis to ignore the offset in this scenario. The Exchange 
proposes to amend the Rule accordingly.
Third Rule Change
    The third proposed rule change regards an Order with the Pegging 
Attribute that a participant: (1) enters before the Nasdaq Closing 
Cross occurs at 4:00 p.m.; and (2) assigns a TIF which designates the 
Order for extended hours trading if it remains unexecuted after the 
Cross concludes (while bypassing the Extended Trading Close). Under the 
Rule, as amended by SR-Nasdaq-2022-051, such an Order would be booked 
into the System, but if it remains unexecuted after the Nasdaq Closing 
Cross concludes, the Order would remain booked and commence extended 
hours trading, but the System would deactivate its Pegging Attribute 
when doing so. In other words, the Order would cease managing the 
pegged price of the Order after 4 p.m. This practice is consistent with 
Equity 4, Rule 4703(d), which states that ``Pegging is available only 
during Market Hours.''
    The Exchange now proposes to amend Rule 4703(d) to state that if a 
participant enters a Peg Managed Order \14\ prior to the Nasdaq Closing 
Cross with a TIF that allows for extend hours trading (other than in 
the Extended Trading Close), the System will cancel that Order if 
unexecuted after the Nasdaq Closing Cross concludes. By contrast, if a 
participant enters a Fixed Midpoint Order \15\ in the same scenario, 
the System will act as it does now--it will deactivate the Pegging 
Attribute for the Order once extend hours trading commences.
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    \14\ A ``Peg Managed Order'' is a Primary Pegged, Market Pegged, 
or Managed Midpoint Order. See 4703(d) (as amended by SR-Nasdaq-
2022-051). A ``Managed Midpoint Order,'' in turn, is a Midpoint 
Pegging Order which the System may update in response to changes to 
the Midpoint. See id.
    \15\ A ``Fixed Midpoint Order'' is a Midpoint Pegging Order 
which the System will cancel in response to changes to the Midpoint. 
See id.
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    In time, the proposed treatment of Peg Managed Orders during 
extended hours trading is that which the Exchange intends to apply to 
all Midpoint Pegging Orders. However, this functionality is not yet 
ready to make it available for Fixed Midpoint Orders. Thus, in the 
interim, existing practice will continue.
Fourth Rule Change
    The fourth proposal would amend Equity 4, Rule 4703(h), to correct 
its description of behavior of the Non-Displayed portion of Orders with 
the Reserve Attribute.\16\ As amended by SR-Nasdaq-2022-051, Rule 
4703(h) provides as follows, in pertinent part:
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    \16\ ``Reserve Size'' is, in part, an Order Attribute that 
``permits a Participant to stipulate that an Order Type that is 
displayed may have its displayed size replenished from additional 
non-displayed size.'' Rule 4703(h). The Rule also states that 
Reserve ``is not available for Orders that are not displayed; 
provided, however, that if a Participant enters Reserve Size for a 
Non-Displayed Order with a Time-in-Force of IOC, the full size of 
the Order, including Reserve Size, will be processed as a Non- 
Displayed Order.'' Id. In addition to the change proposed above, the 
Exchange proposes to eliminate from the immediately preceding 
language ``with a Time-in-Force of IOC'' because the Exchange does 
not assess a reason to include this qualifier. The statement that a 
Non-Displayed Order with Reserve will be entirely non-displayed is 
true even as to Non-Displayed Orders with other TIFs.
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    In all cases, if the remaining size of the Non-Displayed Order is 
less than the fixed or random amount stipulated by the Participant, the 
full remaining size of the Non-Displayed Order will be displayed and 
the Non-Displayed Order will be removed.
    As stated, this Rule requires that the entire Non-Displayed portion 
of a Reserve Order will become Displayed the moment the size of the 
Non-Displayed portion \17\ drops below an amount that a participant 
designates or has directed the System to randomly designate (the ``Max 
Floor''). In conducting a test of System behavior, however, the 
Exchange observed that the System does not, in fact, operate in this 
manner. Instead, the System maintains the Non-Displayed portion of a 
Reserve Order as such when the size of that Non-Displayed Portion drops 
below the Max Floor. Rather than correct the current System behavior to 
match the Rule, the Exchange determined that users of Reserve Orders 
prefer the current System behavior because it is true to the underlying 
intent of Reserve functionality, which is to help limit the price 
impacts of trading large quantities of shares by displaying only small 
portions of such shares at a given time, while hiding the rest in 
reserve. Thus, the Exchange proposes to address the inconsistency 
between the Rule text and the behavior of the System by deleting the 
aforementioned language from Rule 4703(d) [sic]. Going forward, the 
System will not convert to a Displayed Order the Non-Displayed 
remainder of a Reserve Order that falls below the Max Floor, and the 
System will not remove it.
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    \17\ Whenever a participant enters an Order with Reserve Size, 
the full size of the Order will be presented for potential execution 
in compliance with Regulation NMS; thereafter, unexecuted portions 
of the Order will be processed as two Orders: a Displayed Order 
(with the characteristics of its selected Order Type) and a Non-
Displayed Order. See id. When an Order with Reserve Size is posted, 
if there is an execution against the Displayed Order that causes its 
size to decrease below a normal unit of trading, another Displayed 
Order will be entered at the limit price and size stipulated by the 
Participant while the size of the Non-Displayed Order will be 
reduced by the same amount. See id.
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2. Statutory Basis
    The Exchange believes that its proposals are consistent with 
Section 6(b) of the Act,\18\ in general, and further the objectives of 
Section 6(b)(5) of the Act,\19\ in particular, in that they are 
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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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    It is consistent with the Act and in the best interests of 
investors and the public to announce a delay in its completion of 
implementing the amendments to the Exchange's Rulebook set forth in SR-
Nasdaq-2022-051. Doing so will avoid confusion as to which rules and 
functionality will apply during the interim period. As noted earlier, 
the Exchange has and will continue to notify market participants 
through Equity Trader Alerts in advance of implementing any new 
functionality set forth in SR-Nasdaq-2022-051.
    It is also consistent with the Act to amend the Exchange's Rules to 
address inconsistencies between the Rule text and observed System 
behavior, including by adapting the Rule text to codify observed System 
behavior, where the observed behavior is more consistent with the 
underlying purpose of an Order Attribute than is the Rule text 
(maintaining the Non-Displayed status of a reserve portion of a Reserve 
Order that drops below the Max Floor), where the Exchange discerns no 
logical reason to maintain the existing Rule text (ignoring an offset 
assigned to MOOs with Market Pegging entered after the Nasdaq Opening 
Cross occurs), and where System behavior reflects a nuance not 
contemplated by the existing Rules (clarifying that the prohibition 
against repricing Market Maker Peg Orders that have prices equal to or 
better than the NBBO only applies to round lot Market Maker Peg Orders, 
and not to odd lots).
    Likewise, it is consistent with the Act to amend the Exchange's 
Rules to provide for the System to cancel Managed Peg Orders designated 
for extended hours trading, when such Orders remain unexecuted in the

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Nasdaq Closing Cross, due to the fact that the Rule text provides that 
pegging is only available during market hours. It is also consistent 
with the Act to maintain its existing practice for Fixed Midpoint 
Orders, in the same scenario, of deactivating the Pegging Attribute 
during extended hours trading. Although the proposal will create 
disparate treatment of Managed Peg Orders and Fixed Midpoint Orders, 
the Exchange intends to eliminate this disparity over time by providing 
for Fixed Midpoint Orders to behave in the same way as Managed Peg 
Orders. Until that occurs, maintaining existing practice for Fixed 
Midpoint Orders is consistent with the Rule.
    Finally, it is consistent with the Act to amend Rule 4703(h) to 
delete qualifying language which erroneously suggests that Non-
Displayed Orders with Reserve are only non-displayed when such Orders 
have a TIF of IOC. Investors and the public have an interest in the 
Exchange maintaining a Rulebook that is accurate.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposals merely delay 
completion of its implementation of SR-Nasdaq-2022-051 as well as 
address inconsistencies between Rule text and System behavior that 
became apparent during the course of this implementation. The Exchange 
neither intends nor perceives that these rule changes will have any 
impact on competition.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \22\ and Rule 19b-
4(f)(6)(iii) thereunder.\23\
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6).
    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 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, along 
with a brief description and text of 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 such 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 under 
Section 19(b)(2)(B) \24\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NASDAQ-2023-030 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-2023-030. 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 (https://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. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NASDAQ-2023-030 and should 
be submitted on or before September 21, 2023.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-18777 Filed 8-30-23; 8:45 am]
BILLING CODE 8011-01-P