Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change To Modify Chapter V, Section 4 and Chapter VI, Section 8 of the Exchange's Rules Relating to Opening and Halt Crosses on the NASDAQ Options Market, 28257-28260 [2011-11919]

Download as PDF Federal Register / Vol. 76, No. 94 / Monday, May 16, 2011 / Notices is designed to provide for the equitable allocation of reasonable dues, fees and other charges among its Participants and other persons using the facilities. The proposed rule is codifying a practice currently employed by Exchange and the OCC. By adopting this rule, the Exchange is providing Participants with a description of the Covered Sale Fee and the process by which the Covered Sale Fee is collected. 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. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Exchange Act 11 and Rule 19b–4(f)(2) thereunder,12 because it establishes or changes a due, fee, or other charge applicable only to a member. 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. 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: Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. erowe on DSK5CLS3C1PROD with NOTICES U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). VerDate Mar<15>2010 15:14 May 13, 2011 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 64143 (March 29, 2011), 76 FR 18589 (April 4, 2011) (‘‘Notice’’). 2 17 13 17 Jkt 223001 [Release No. 34–64463; File No. SR– NASDAQ–2011–037] A. Elimination of the Order Imbalance Tie-Breaker and Modification of the Mid-Point Tie-Breaker NOM currently employs a series of tie-breakers that resolve instances where multiple prices satisfy the conditions for • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–BX–2011–024 on the subject line. 12 17 SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change To All submissions should refer to File Modify Chapter V, Section 4 and Number SR–BX–2011–024. This file Chapter VI, Section 8 of the number should be included on the subject line if e-mail is used. To help the Exchange’s Rules Relating to Opening and Halt Crosses on the NASDAQ Commission process and review your Options Market comments more efficiently, please use only one method. The Commission will May 11, 2011. post all comments on the Commission’s I. Introduction Internet Web site (http://www.sec.gov/ On March 15, 2011, The NASDAQ rules/sro.shtml). Copies of the Stock Market LLC (‘‘NASDAQ’’ or submission, all subsequent ‘‘Exchange’’) filed with the Securities amendments, all written statements and Exchange Commission with respect to the proposed rule (‘‘Commission’’), pursuant to Section change that are filed with the 19(b)(1) of the Securities Exchange Act Commission, and all written of 1934 (‘‘Act’’),1 and Rule 19b-4 communications relating to the thereunder,2 a proposed rule change to proposed rule change between the modify the procedures for the opening Commission and any person, other than of trading at the start of the trading day those that may be withheld from the and at the resumption of trading public in accordance with the following a trading halt on the NASDAQ provisions of 5 U.S.C. 552, will be Options Market (‘‘NOM’’). The proposed available for Web site viewing and rule change was published for comment printing in the Commission’s Public in the Federal Register on April 4, Reference Room, 100 F Street, NE., 2011.3 The Commission received no comment letters regarding the proposal. Washington, DC 20549, on official This order approves the proposed rule business days between the hours of 10 change. a.m. and 3 p.m. Copies of such filing also will be available for inspection and II. Description of the Proposal copying at the principal office of the The Exchange proposes to modify Exchange. All comments received will Chapter V, Section 4 and Chapter VI, be posted without change; the Section 8 of the Exchange’s rules (‘‘NOM Commission does not edit personal Rules’’) governing the opening of trading identifying information from at the start of the trading day and at the submissions. You should submit only resumption of trading following a information that you wish to make trading halt on NOM. Specifically, the available publicly. All submissions Exchange proposes to: (1) Eliminate one should refer to File Number SR–BX– tie-breaker and modify a second tie2011–024 and should be submitted on breaker used to establish the Current or before June 6, 2011. Reference Price and cross price; (2) modify the circumstances whereby the For the Commission, by the Division of Exchange disseminates an indicative Trading and Markets, pursuant to delegated indicator of ‘‘market;’’ (3) change the authority.13 start time for imbalance and indicative Cathy H. Ahn, data dissemination; (4) clarify when an Deputy Secretary. Order Imbalance Indicator is [FR Doc. 2011–11917 Filed 5–13–11; 8:45 am] disseminated; and (5) establish a halt BILLING CODE 8011–01–P cross. Electronic Comments 11 15 28257 PO 00000 CFR 200.30–3(a)(12). Frm 00049 Fmt 4703 Sfmt 4703 E:\FR\FM\16MYN1.SGM 16MYN1 28258 Federal Register / Vol. 76, No. 94 / Monday, May 16, 2011 / Notices erowe on DSK5CLS3C1PROD with NOTICES executing the opening cross. These tiebreakers govern the calculation of the Current Reference Price, which is disseminated to market participants prior to the execution of the opening cross, and the calculation of the actual cross price.4 The tie-breakers are criteria that operate in a hierarchy. If one and only one price satisfies the first criterion, the system has no need to consider the second tie-breaker, and, instead, the system will execute the cross. Conversely, if multiple prices satisfy the first criterion, the algorithm turns to the second criterion, and, if multiple prices satisfy the second criterion, the algorithm then turns to the third criterion. Currently, the first tiebreaker is the single price at which the maximum number of contracts of Eligible Interest 5 can be paired at or within the National Best Bid and Offer (‘‘NBBO’’).6 The Exchange proposes to eliminate what currently serves as the second tiebreaker (the ‘‘Order Imbalance TieBreaker’’).7 Specifically, under this second tie-breaker, when more than one price satisfies the first condition for the opening cross, the system will choose the price which minimizes the order imbalance remaining if the cross were to be executed. The Exchange represents that it has determined to eliminate the Order Imbalance Tie-Breaker because it has not proven useful in augmenting price discovery prior to the cross or in operating an effective opening cross.8 The Exchange noted that it initially adopted the Order Imbalance TieBreaker based upon its successful use in the equities opening cross.9 However, the Exchange believes that, in its experience, the Order Imbalance TieBreaker has not performed well for the options cross because imbalances occur less often in the options market and such imbalances generally are much smaller in size than in the equities market.10 As a result, the Exchange believes that the size of an imbalance in an options cross rarely provides a meaningful basis for distinguishing between multiple prices at which a cross could occur and that elimination of the Order Imbalance Tie-Breaker 4 See NOM Rules Chapter VI, Section 8(a)(2)(A), (b)(2). 5 ‘‘Eligible Interest’’ is any quotation or any order that may be entered into the system and designated with a time-in-force of IOC, DAY, GTC, EXPR. See NOM Rules Chapter VI, Section 8(a)(4). 6 See NOM Rules Chapter VI, Section 8(a)(2)(A)(i), (b)(2)(A). 7 See NOM Rules Chapter VI, Section 8(a)(2)(A)(ii), (b)(2)(B). 8 See Notice, supra note 3, 76 FR at 18589–90. 9 See id. at 18590. 10 See id. VerDate Mar<15>2010 15:14 May 13, 2011 Jkt 223001 would not hinder price discovery and would allow the Exchange to focus the cross on the most relevant criteria.11 In addition, the Exchange is proposing to modify the current third tie-breaker (the ‘‘Mid-Point TieBreaker’’).12 Rather than choosing the mid-point of the NBBO, as happens today under this tie-breaker, the Exchange would choose a price that it believes more accurately represents the supply and demand in the market at the time of reference price dissemination and/or auction execution.13 To achieve that end, the Exchange would set a minimum threshold price, based on the higher of the last-crossed NOM offer or the National Best Bid, and a maximum threshold price, based on the lower of the last-crossed NOM bid or the National Best Offer. The mid-point (in $0.01 increments) of those threshold prices would be the Current Reference Price or opening cross price if this MidPoint Tie-Breaker were reached.14 The Exchange believes that this formulation would improve price discovery and execution quality.15 B. Modification of Indicative Indicator Dissemination of ‘‘Market’’ The indicative price is the price at which the NOM opening cross would occur if the opening cross were to occur at that time.16 The Exchange disseminates an indicative indicator for ‘‘market buy’’ or ‘‘market sell’’ if marketable buy (sell) contracts would remain unexecuted above (below) the Near or Far Clearing Prices, respectively.17 The Exchange proposes to modify when an indicative inidcator is disseminated with a price of ‘‘market buy’’ or ‘‘market sell.’’ 18 First, such message would be disseminated when there is trading interest with a market price that is not offset, not when there is marketable interest, as is currently the practice. Second, whether NOM disseminates an indicative price of ‘‘market’’ would no longer depend upon the available interest being priced lower or higher than the Near or Far Clearing 11 See id. NOM Rules Chapter VI, Section 8(a)(2)(A)(iv), (b)(2)(C). 13 See Notice, supra note 3, 76 FR at 18590. 14 The Exchange provides three examples, illustrating the operation of this new Mid-Point TieBreaker in the Notice. See id. 15 See id. 16 See NOM Rules Chapter VI, Section 8(a)(E). 17 See NOM Rules Chapter VI, Section 8(a)(E)(iii). The Near and Far Clearing Prices are defined in NASDAQ Rule 4752. For the purpose of NOM Rules Chapter VI, Section 8, both are equal to the Current Reference Price. See NOM Rules Chapter VI, Section 8(a)(2)(E)(i)–(ii). 18 NOM Rules Chapter VI, Section 8(a)(2)(E)(iii) governs when this dissemination occurs. Prices, respectively. The Exchange believes this formulation of ‘‘market’’ will reduce any potential for confusion about its dissemination practices.19 C. Change of the Start Time for Data Dissemination The Exchange also proposes to change the time at which imbalance and indicative price data will begin to be disseminated.20 Currently, the Exchange begins indicative data dissemination at 9:25 a.m. EST. However, the Exchange represents that it has received feedback from market participants that certain option classes might benefit from a different dissemination window due to the trading characteristics of such option classes.21 Accordingly, the Exchange proposes to commence dissemination of the imbalance and indicative price data anywhere between 9:20 a.m. and 9:28 a.m. EST. The initial default time to begin dissemination will remain at 9:25 a.m. EST, but the Exchange would have discretion to pick a different time for an option class. When the Exchange does change the start time for data dissemination, the new start time of imbalance and data dissemination for such class would be published in advance and with equal access on the NASDAQ Trader Web ite.22 The Exchange represents that deviations from the default start time of 9:25 a.m. EST would be rare.23 D. Clarification of Dissemination of the Order Imbalance Indicator The Exchange proposes to clarify when an Order Imbalance Indicator will be disseminated just prior to the opening cross.24 Currently, any time an imbalance remains just prior to the opening cross, the Exchange disseminates a final Order Imbalance Indicator. As proposed, NASDAQ would disseminate this final Order Imbalance Indicator only when the imbalance contains routable trading interest that is marketable against the NBBO. The Exchange believes nonroutable interest is best served by being posted on NOM after execution of the opening cross.25 Once the cross is 12 See PO 00000 Frm 00050 Fmt 4703 Sfmt 4703 19 See Notice, supra note 3, 76 FR at 18590. Rules Chapter VI, Section 8(b)(1) governs when this dissemination occurs. 21 See Notice, supra note 3, 76 FR at 18590. 22 See id. 23 See id. 24 NOM Rules Chapter VI, Section 8(b)(5) governs when this dissemination occurs. 25 See Notice, supra note 3, 76 FR at 18590. The Exchange states that the goal of NOM’s open is to attract as much liquidity as possible to interact with any orders that are marketable at the time of the open. See id. The Exchange believes that the change to post non-routable orders (at the NBBO) rather than disseminating additional imbalance messages 20 NOM E:\FR\FM\16MYN1.SGM 16MYN1 Federal Register / Vol. 76, No. 94 / Monday, May 16, 2011 / Notices executed and the order is posted, that trading interest would be disseminated as part of the Exchange’s best bid or offer via the consolidated data feed. The Exchange believes this broad dissemination would better advertise the trading interest and thereby increase the likelihood of an execution.26 Additionally, the Exchange proposes to clarify that, after the opening cross is executed, all orders in the imbalance would be cancelled, routed, or posted in accordance with the entering party’s instructions. E. Establishment of a Halt Cross Finally, in order to provide a more orderly opening of the market after a trading halt, the Exchange proposes to establish an opening cross after the termination of a trading halt.27 The opening cross following a trading halt would operate in the same manner as the opening cross at the start of the trading day, including dissemination of the Order Imbalance Indicator, matching algorithm, and posting or routing of interest that remains unexecuted following execution of the cross. The opening cross for halted options would differ from the opening cross only in the time at which it occurs.28 erowe on DSK5CLS3C1PROD with NOTICES III. Discussion After careful review of the proposal, 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.29 In provides more advertisement for the order because it is broadcast over the consolidated quote feed rather than just NASDAQ’s proprietary market data feeds. See id. Additionally, for routable orders, the Exchange would continue the current process of advertising the order(s) via an imbalance message on its proprietary market data feeds rather than opening immediately and routing the order away. By doing this, the Exchange represents that its goal is to get the order a price that is equal to or better than the away quoted price. See id. 26 See id. 27 When the Exchange first proposed rules for NOM, it planned to resume trading after a halt by conducting a ‘‘Halt Cross.’’ In response to comments received on that proposal that the market relies on price discovery from the underlying security rather than on the availability of interest in a cross, the Exchange determined to remove the Halt Cross. See Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR– NASDAQ–2007–004) and (SR–NASDAQ–2007–080) (approval order regarding NOM Rules including Chapters III and XIV). 28 See NOM Rules Chapter V, Section 4 (providing that trading in an option that has been the subject of a halt shall be resumed upon the determination by Nasdaq Regulation that the conditions which led to the halt are no longer present or that the interests of a fair and orderly market are best served by a resumption of trading). 29 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). VerDate Mar<15>2010 15:14 May 13, 2011 Jkt 223001 particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,30 which requires, among other things, that the rules of an exchange be 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. The Commission believes that the proposed elimination of the Order Imbalance Tie-Breaker and modification of the Mid-Point Tie-Breaker are consistent with the Act. Although the Exchange is eliminating the Order Imbalance Tie Breaker and modifying the Mid-Point Tie Breaker, the Exchange will continue to employ a series of tiebreakers to determine the Current Reference Price and the opening cross price where multiple prices satisfy the conditions for executing the opening cross. The Exchange represents that, since NOM was launched on March 31, 2008, it has monitored the operation of the market to identify instances where market efficiency can be enhanced.31 According to the Exchange, the Order Imbalance Tie-Breaker has not proven useful in augmenting price discovery prior to the opening cross or in operating an effective opening cross.32 The Exchange also believes that the proposed modification to the Mid-Point Tie-Breaker will more accurately represent the supply and demand in the market at the time of reference price dissemination and/or auction execution.33 The Commission believes that the elimination of the Order Imbalance Tie Breaker is reasonable, given that the Exchange has not found it to be useful in augmenting price discovery. The Exchange is not proposing to change the primary criteria whereby the Current Reference Price is calculated to be the single price at which the maximum number of contracts of Eligible Interest can be paired at or within the NBBO. If more than one price satisfies this condition, the Exchange will continue to employ a series of iterative tie-breakers that are designed to facilitate an orderly opening. Further, the proposed change to the Mid-Point Tie-Breaker is intended to aid in facilitating orderly openings at 30 15 U.S.C. 78f(b)(5). e.g., Securities Exchange Act Release Nos. 57822 (May 15, 2008), 73 FR 29800 (May 22, 2008)) (SR–NASDAQ–2008–045); 57977 (June 17, 2008), 73 FR 35429 (June 23, 2008) (SR–NASDAQ–2008– 052); 60905 (Oct. 30, 2009), 74 FR 57544 (Nov. 6, 2009)) (SR–NASDAQ–2009–033). See also Notice, supra note 3, 76 FR at 18589. 32 See Notice, supra note 3, 76 FR at 18589–90. 33 See id. 31 See, PO 00000 Frm 00051 Fmt 4703 Sfmt 4703 28259 prices reflective of the market. Accordingly, as revised, the Exchange’s opening process will continue to be designed to facilitate orderly openings and encourage price discovery and liquidity. The Commission finds that the proposed modification to the dissemination of an indicative indicator of ‘‘market buy’’ or ‘‘market sell’’ is consistent with the Act. The Exchange proposes to disseminate the indicative message of ‘‘market buy’’ or ‘‘market sell’’ when there is interest with a market price that is not offset, irrespective of the Near or Far Clearing Prices. Currently, such message is disseminated only when there is marketable interest depending on whether the available interest is lower or higher than the Near or Far Clearing Prices, respectively. This change is intended to reduce any potential for confusion regarding the meaning of an indicator that specifies ‘‘market.’’ 34 The Commission believes that NASDAQ’s revised dissemination of a ‘‘market’’ indicator in connection with its opening process will benefit investors and improve transparency by providing market participants with useful information during the opening cross. The Commission finds that the proposed change to allow NOM to select a different start time for imbalance and indicative data dissemination for a class within the window of 9:20 a.m. and 9:28 a.m. EST is consistent with the Act. Currently, the Exchange begins indicative data dissemination at 9:25 a.m. EST as previously approved by the Commission.35 The Exchange represents that it will continue to use 9:25 a.m. EST as the default start time and that changes to this default start time will be rare. The Commission notes that, if the Exchange decides to change the start time, then it will publish the new time of imbalance and indicative price data dissemination commencement in advance on the publicly accessible NASDAQ Trader website. This change will give the Exchange more flexibility to determine the most appropriate time for data dissemination in an option class that NASDAQ believes will be most conducive to price discovery based on the trading characteristics of such option class. Further, the Commission believes that the advance notice on the NASDAQ Trader website of any change in the commencement of dissemination of imbalance and indicative price data will continue to ensure certainty with respect to the time of dissemination. 34 See 35 See E:\FR\FM\16MYN1.SGM Notice, supra note 3, 76 FR at 18590. id. 16MYN1 28260 Federal Register / Vol. 76, No. 94 / Monday, May 16, 2011 / Notices The Commission finds that the proposed modification to the dissemination of the final Order Imbalance Indicator is consistent with the Act. Currently, any time an imbalance remains just prior to the opening cross, the Exchange disseminates one last Order Imbalance Indicator. The Exchange proposes to disseminate that final Order Imbalance Indicator only when the imbalance contains routable trading interest that is marketable against the NBBO. After the opening cross is executed, any nonroutable interest that is not cancelled will be posted. As such, dissemination of this interest will be broadcast via the consolidated quote. The effect of this change is that the Exchange will not disseminate the very last Order Imbalance Indicator that it would otherwise have disseminated right before the opening cross when the imbalance only contains non-routable interest. While this change could have the effect of reducing the last message on imbalances that the Exchange currently sends immediately before the opening cross, it also mitigates message traffic for orders that the Exchange expects would post immediately thereafter. The Commission believes this change will not adversely affect transparency with respect to imbalance information immediately prior to the opening cross. The Commission finds that the proposed establishment of an opening cross following a trading halt is consistent with the Act. The Exchange believes that conducting an opening cross will provide a more orderly opening of the market after a halt, particularly to the extent that NOM attracts higher levels of liquidity than it did previously.36 The Commission notes that the halt cross will operate in the same manner as the opening cross. It is also consistent with the use of an opening cross following a trading halt on NASDAQ’s equities platform.37 The Commission notes that similar auctions are used by other options markets following a trading halt.38 The Commission believes that the adoption of a halt cross is designed to provide for 36 See id. at 18591. NASDAQ Rule 4753. 38 See, e.g., Securities Exchange Act Release No. 54238 (July 28, 2006), 71 FR 44758, 44762 (August 7, 2006) (SR–NYSEArca–2006–13) (approving the OX Trading Platform, including trading auctions following halts, for NYSE Arca, Inc. (‘‘NYSE Arca’’)); Securities Exchange Act Release No. 59472 (February 27, 2009), 74 FR 9843, 9851 (March 6, 2009) (SR–NYSEALTR–2008–14) (finding that NYSE Alternext US LLC’s (now NYSE Amex LLC) rules on trading auctions and procedures for trading halts are closely modeled on the rules of NYSE Arca and consistent with the Act). erowe on DSK5CLS3C1PROD with NOTICES 37 See VerDate Mar<15>2010 15:14 May 13, 2011 Jkt 223001 a fair and orderly re-opening of the market and contribute to the quality of executions following a trading halt. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,39 that the proposed rule change (SR–NASDAQ– 2011–037) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.40 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–11919 Filed 5–13–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64451; File No. SR–Phlx– 2011–59] Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX LLC Relating to Inactive Nominees May 10, 2011. 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 May 3, 2011, NASDAQ OMX PHLX LLC (‘‘Phlx’’ 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to codify its existing procedures to designate an Inactive Nominee as an effective permit holder and make other non-substantive clarifying changes to the text of Rule 925 titled ‘‘Inactive Nominees.’’ 3 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 The term ‘‘inactive nominee’’ means a natural person associated with and designated as such by a member organization and who has been approved for such status and is registered as such with the Membership Department. An Inactive Nominee shall have no rights or privileges under a permit unless and until said Inactive Nominee becomes admitted as a member of the Exchange pursuant to the By-Laws and Rules of the Exchange. An Inactive Nominee merely stands ready to exercise rights under a permit upon notice by the member organization to the Membership Department on an expedited basis. See Exchange Rule 1(i) [sic]. The Exchange is also proposing to amend certain typographical errors in Exchange Rules 1 and 124 and By-Law Article II. The text of the proposed rule change is available on the Exchange’s Web site at http://nasdaqtrader.com/ micro.aspx?id=PHLXfilings, at the principal office of the Exchange, at the Commission’s Public Reference Room, and on the Commission’s Web site at http://www.sec.gov. 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 purpose of the proposed rule change is to codify the Exchange’s existing procedures for designating an Inactive Nominee as an effective permit holder. Additionally, the Exchange is proposing to amend the text of Rule 925 to delete irrelevant and repetitive rule language. Rule 925 titled ‘‘Inactive Nominees’’ states that a member organization may designate an individual as an ‘‘Inactive Nominee’’ and shall pay for the privilege of maintaining that status.4 Further, to be eligible as an Inactive Nominee, an individual must be approved as eligible to hold a permit in accordance with the Exchange’s By-Laws and Rules. Pursuant to Rule 925, an Inactive Nominee does not have any rights or 39 15 40 17 PO 00000 Frm 00052 Fmt 4703 Sfmt 4703 4 The Exchange assesses an Inactive Nominee Fee of $500 for every six months and a monthly Trading Floor Personnel Registration Fee of $100 on Inactive Nominees. See the Exchange’s Fee Schedule. An Inactive Nominee is also assessed the Application and Initiation Fees when such person applies to be an Inactive Nominee. Such fees are reassessed if there is a lapse in the Inactive Nominee’s membership status. However, an Inactive Nominee would not be assessed the Application and Initiation Fees if such Inactive Nominee applied for membership without a lapse in that individual’s association with a particular member organization. See Securities Exchange Act Release No. 64010 (March 2, 2011), 76 FR 12780 (March 8, 2011) (SR– Phlx–2011–26). E:\FR\FM\16MYN1.SGM 16MYN1

Agencies

[Federal Register Volume 76, Number 94 (Monday, May 16, 2011)]
[Notices]
[Pages 28257-28260]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11919]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64463; File No. SR-NASDAQ-2011-037]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Order Approving Proposed Rule Change To Modify Chapter V, Section 4 and 
Chapter VI, Section 8 of the Exchange's Rules Relating to Opening and 
Halt Crosses on the NASDAQ Options Market

May 11, 2011.

I. Introduction

    On March 15, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') 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 modify the procedures for the opening of 
trading at the start of the trading day and at the resumption of 
trading following a trading halt on the NASDAQ Options Market 
(``NOM''). The proposed rule change was published for comment in the 
Federal Register on April 4, 2011.\3\ The Commission received no 
comment letters regarding the proposal. This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64143 (March 29, 
2011), 76 FR 18589 (April 4, 2011) (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to modify Chapter V, Section 4 and Chapter 
VI, Section 8 of the Exchange's rules (``NOM Rules'') governing the 
opening of trading at the start of the trading day and at the 
resumption of trading following a trading halt on NOM. Specifically, 
the Exchange proposes to: (1) Eliminate one tie-breaker and modify a 
second tie-breaker used to establish the Current Reference Price and 
cross price; (2) modify the circumstances whereby the Exchange 
disseminates an indicative indicator of ``market;'' (3) change the 
start time for imbalance and indicative data dissemination; (4) clarify 
when an Order Imbalance Indicator is disseminated; and (5) establish a 
halt cross.

A. Elimination of the Order Imbalance Tie-Breaker and Modification of 
the Mid-Point Tie-Breaker

    NOM currently employs a series of tie-breakers that resolve 
instances where multiple prices satisfy the conditions for

[[Page 28258]]

executing the opening cross. These tie-breakers govern the calculation 
of the Current Reference Price, which is disseminated to market 
participants prior to the execution of the opening cross, and the 
calculation of the actual cross price.\4\ The tie-breakers are criteria 
that operate in a hierarchy. If one and only one price satisfies the 
first criterion, the system has no need to consider the second tie-
breaker, and, instead, the system will execute the cross. Conversely, 
if multiple prices satisfy the first criterion, the algorithm turns to 
the second criterion, and, if multiple prices satisfy the second 
criterion, the algorithm then turns to the third criterion. Currently, 
the first tie-breaker is the single price at which the maximum number 
of contracts of Eligible Interest \5\ can be paired at or within the 
National Best Bid and Offer (``NBBO'').\6\
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    \4\ See NOM Rules Chapter VI, Section 8(a)(2)(A), (b)(2).
    \5\ ``Eligible Interest'' is any quotation or any order that may 
be entered into the system and designated with a time-in-force of 
IOC, DAY, GTC, EXPR. See NOM Rules Chapter VI, Section 8(a)(4).
    \6\ See NOM Rules Chapter VI, Section 8(a)(2)(A)(i), (b)(2)(A).
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    The Exchange proposes to eliminate what currently serves as the 
second tie-breaker (the ``Order Imbalance Tie-Breaker'').\7\ 
Specifically, under this second tie-breaker, when more than one price 
satisfies the first condition for the opening cross, the system will 
choose the price which minimizes the order imbalance remaining if the 
cross were to be executed.
---------------------------------------------------------------------------

    \7\ See NOM Rules Chapter VI, Section 8(a)(2)(A)(ii), (b)(2)(B).
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    The Exchange represents that it has determined to eliminate the 
Order Imbalance Tie-Breaker because it has not proven useful in 
augmenting price discovery prior to the cross or in operating an 
effective opening cross.\8\ The Exchange noted that it initially 
adopted the Order Imbalance Tie-Breaker based upon its successful use 
in the equities opening cross.\9\ However, the Exchange believes that, 
in its experience, the Order Imbalance Tie-Breaker has not performed 
well for the options cross because imbalances occur less often in the 
options market and such imbalances generally are much smaller in size 
than in the equities market.\10\ As a result, the Exchange believes 
that the size of an imbalance in an options cross rarely provides a 
meaningful basis for distinguishing between multiple prices at which a 
cross could occur and that elimination of the Order Imbalance Tie-
Breaker would not hinder price discovery and would allow the Exchange 
to focus the cross on the most relevant criteria.\11\
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    \8\ See Notice, supra note 3, 76 FR at 18589-90.
    \9\ See id. at 18590.
    \10\ See id.
    \11\ See id.
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    In addition, the Exchange is proposing to modify the current third 
tie-breaker (the ``Mid-Point Tie-Breaker'').\12\ Rather than choosing 
the mid-point of the NBBO, as happens today under this tie-breaker, the 
Exchange would choose a price that it believes more accurately 
represents the supply and demand in the market at the time of reference 
price dissemination and/or auction execution.\13\ To achieve that end, 
the Exchange would set a minimum threshold price, based on the higher 
of the last-crossed NOM offer or the National Best Bid, and a maximum 
threshold price, based on the lower of the last-crossed NOM bid or the 
National Best Offer. The mid-point (in $0.01 increments) of those 
threshold prices would be the Current Reference Price or opening cross 
price if this Mid-Point Tie-Breaker were reached.\14\ The Exchange 
believes that this formulation would improve price discovery and 
execution quality.\15\
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    \12\ See NOM Rules Chapter VI, Section 8(a)(2)(A)(iv), 
(b)(2)(C).
    \13\ See Notice, supra note 3, 76 FR at 18590.
    \14\ The Exchange provides three examples, illustrating the 
operation of this new Mid-Point Tie-Breaker in the Notice. See id.
    \15\ See id.
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B. Modification of Indicative Indicator Dissemination of ``Market''

    The indicative price is the price at which the NOM opening cross 
would occur if the opening cross were to occur at that time.\16\ The 
Exchange disseminates an indicative indicator for ``market buy'' or 
``market sell'' if marketable buy (sell) contracts would remain 
unexecuted above (below) the Near or Far Clearing Prices, 
respectively.\17\ The Exchange proposes to modify when an indicative 
inidcator is disseminated with a price of ``market buy'' or ``market 
sell.'' \18\ First, such message would be disseminated when there is 
trading interest with a market price that is not offset, not when there 
is marketable interest, as is currently the practice. Second, whether 
NOM disseminates an indicative price of ``market'' would no longer 
depend upon the available interest being priced lower or higher than 
the Near or Far Clearing Prices, respectively. The Exchange believes 
this formulation of ``market'' will reduce any potential for confusion 
about its dissemination practices.\19\
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    \16\ See NOM Rules Chapter VI, Section 8(a)(E).
    \17\ See NOM Rules Chapter VI, Section 8(a)(E)(iii). The Near 
and Far Clearing Prices are defined in NASDAQ Rule 4752. For the 
purpose of NOM Rules Chapter VI, Section 8, both are equal to the 
Current Reference Price. See NOM Rules Chapter VI, Section 
8(a)(2)(E)(i)-(ii).
    \18\ NOM Rules Chapter VI, Section 8(a)(2)(E)(iii) governs when 
this dissemination occurs.
    \19\ See Notice, supra note 3, 76 FR at 18590.
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C. Change of the Start Time for Data Dissemination

    The Exchange also proposes to change the time at which imbalance 
and indicative price data will begin to be disseminated.\20\ Currently, 
the Exchange begins indicative data dissemination at 9:25 a.m. EST. 
However, the Exchange represents that it has received feedback from 
market participants that certain option classes might benefit from a 
different dissemination window due to the trading characteristics of 
such option classes.\21\ Accordingly, the Exchange proposes to commence 
dissemination of the imbalance and indicative price data anywhere 
between 9:20 a.m. and 9:28 a.m. EST. The initial default time to begin 
dissemination will remain at 9:25 a.m. EST, but the Exchange would have 
discretion to pick a different time for an option class. When the 
Exchange does change the start time for data dissemination, the new 
start time of imbalance and data dissemination for such class would be 
published in advance and with equal access on the NASDAQ Trader Web 
ite.\22\ The Exchange represents that deviations from the default start 
time of 9:25 a.m. EST would be rare.\23\
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    \20\ NOM Rules Chapter VI, Section 8(b)(1) governs when this 
dissemination occurs.
    \21\ See Notice, supra note 3, 76 FR at 18590.
    \22\ See id.
    \23\ See id.
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D. Clarification of Dissemination of the Order Imbalance Indicator

    The Exchange proposes to clarify when an Order Imbalance Indicator 
will be disseminated just prior to the opening cross.\24\ Currently, 
any time an imbalance remains just prior to the opening cross, the 
Exchange disseminates a final Order Imbalance Indicator. As proposed, 
NASDAQ would disseminate this final Order Imbalance Indicator only when 
the imbalance contains routable trading interest that is marketable 
against the NBBO. The Exchange believes non-routable interest is best 
served by being posted on NOM after execution of the opening cross.\25\ 
Once the cross is

[[Page 28259]]

executed and the order is posted, that trading interest would be 
disseminated as part of the Exchange's best bid or offer via the 
consolidated data feed. The Exchange believes this broad dissemination 
would better advertise the trading interest and thereby increase the 
likelihood of an execution.\26\ Additionally, the Exchange proposes to 
clarify that, after the opening cross is executed, all orders in the 
imbalance would be cancelled, routed, or posted in accordance with the 
entering party's instructions.
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    \24\ NOM Rules Chapter VI, Section 8(b)(5) governs when this 
dissemination occurs.
    \25\ See Notice, supra note 3, 76 FR at 18590. The Exchange 
states that the goal of NOM's open is to attract as much liquidity 
as possible to interact with any orders that are marketable at the 
time of the open. See id. The Exchange believes that the change to 
post non-routable orders (at the NBBO) rather than disseminating 
additional imbalance messages provides more advertisement for the 
order because it is broadcast over the consolidated quote feed 
rather than just NASDAQ's proprietary market data feeds. See id. 
Additionally, for routable orders, the Exchange would continue the 
current process of advertising the order(s) via an imbalance message 
on its proprietary market data feeds rather than opening immediately 
and routing the order away. By doing this, the Exchange represents 
that its goal is to get the order a price that is equal to or better 
than the away quoted price. See id.
    \26\ See id.
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E. Establishment of a Halt Cross

    Finally, in order to provide a more orderly opening of the market 
after a trading halt, the Exchange proposes to establish an opening 
cross after the termination of a trading halt.\27\ The opening cross 
following a trading halt would operate in the same manner as the 
opening cross at the start of the trading day, including dissemination 
of the Order Imbalance Indicator, matching algorithm, and posting or 
routing of interest that remains unexecuted following execution of the 
cross. The opening cross for halted options would differ from the 
opening cross only in the time at which it occurs.\28\
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    \27\ When the Exchange first proposed rules for NOM, it planned 
to resume trading after a halt by conducting a ``Halt Cross.'' In 
response to comments received on that proposal that the market 
relies on price discovery from the underlying security rather than 
on the availability of interest in a cross, the Exchange determined 
to remove the Halt Cross. See Securities Exchange Act Release Nos. 
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004) and (SR-NASDAQ-2007-080) (approval order regarding NOM 
Rules including Chapters III and XIV).
    \28\ See NOM Rules Chapter V, Section 4 (providing that trading 
in an option that has been the subject of a halt shall be resumed 
upon the determination by Nasdaq Regulation that the conditions 
which led to the halt are no longer present or that the interests of 
a fair and orderly market are best served by a resumption of 
trading).
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III. Discussion

    After careful review of the proposal, 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.\29\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\30\ which 
requires, among other things, that the rules of an exchange be 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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    \29\ 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).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed elimination of the Order 
Imbalance Tie-Breaker and modification of the Mid-Point Tie-Breaker are 
consistent with the Act. Although the Exchange is eliminating the Order 
Imbalance Tie Breaker and modifying the Mid-Point Tie Breaker, the 
Exchange will continue to employ a series of tie-breakers to determine 
the Current Reference Price and the opening cross price where multiple 
prices satisfy the conditions for executing the opening cross. The 
Exchange represents that, since NOM was launched on March 31, 2008, it 
has monitored the operation of the market to identify instances where 
market efficiency can be enhanced.\31\ According to the Exchange, the 
Order Imbalance Tie-Breaker has not proven useful in augmenting price 
discovery prior to the opening cross or in operating an effective 
opening cross.\32\ The Exchange also believes that the proposed 
modification to the Mid-Point Tie-Breaker will more accurately 
represent the supply and demand in the market at the time of reference 
price dissemination and/or auction execution.\33\ The Commission 
believes that the elimination of the Order Imbalance Tie Breaker is 
reasonable, given that the Exchange has not found it to be useful in 
augmenting price discovery. The Exchange is not proposing to change the 
primary criteria whereby the Current Reference Price is calculated to 
be the single price at which the maximum number of contracts of 
Eligible Interest can be paired at or within the NBBO. If more than one 
price satisfies this condition, the Exchange will continue to employ a 
series of iterative tie-breakers that are designed to facilitate an 
orderly opening. Further, the proposed change to the Mid-Point Tie-
Breaker is intended to aid in facilitating orderly openings at prices 
reflective of the market. Accordingly, as revised, the Exchange's 
opening process will continue to be designed to facilitate orderly 
openings and encourage price discovery and liquidity.
---------------------------------------------------------------------------

    \31\ See, e.g., Securities Exchange Act Release Nos. 57822 (May 
15, 2008), 73 FR 29800 (May 22, 2008)) (SR-NASDAQ-2008-045); 57977 
(June 17, 2008), 73 FR 35429 (June 23, 2008) (SR-NASDAQ-2008-052); 
60905 (Oct. 30, 2009), 74 FR 57544 (Nov. 6, 2009)) (SR-NASDAQ-2009-
033). See also Notice, supra note 3, 76 FR at 18589.
    \32\ See Notice, supra note 3, 76 FR at 18589-90.
    \33\ See id.
---------------------------------------------------------------------------

    The Commission finds that the proposed modification to the 
dissemination of an indicative indicator of ``market buy'' or ``market 
sell'' is consistent with the Act. The Exchange proposes to disseminate 
the indicative message of ``market buy'' or ``market sell'' when there 
is interest with a market price that is not offset, irrespective of the 
Near or Far Clearing Prices. Currently, such message is disseminated 
only when there is marketable interest depending on whether the 
available interest is lower or higher than the Near or Far Clearing 
Prices, respectively. This change is intended to reduce any potential 
for confusion regarding the meaning of an indicator that specifies 
``market.'' \34\ The Commission believes that NASDAQ's revised 
dissemination of a ``market'' indicator in connection with its opening 
process will benefit investors and improve transparency by providing 
market participants with useful information during the opening cross.
---------------------------------------------------------------------------

    \34\ See Notice, supra note 3, 76 FR at 18590.
---------------------------------------------------------------------------

    The Commission finds that the proposed change to allow NOM to 
select a different start time for imbalance and indicative data 
dissemination for a class within the window of 9:20 a.m. and 9:28 a.m. 
EST is consistent with the Act. Currently, the Exchange begins 
indicative data dissemination at 9:25 a.m. EST as previously approved 
by the Commission.\35\ The Exchange represents that it will continue to 
use 9:25 a.m. EST as the default start time and that changes to this 
default start time will be rare. The Commission notes that, if the 
Exchange decides to change the start time, then it will publish the new 
time of imbalance and indicative price data dissemination commencement 
in advance on the publicly accessible NASDAQ Trader website. This 
change will give the Exchange more flexibility to determine the most 
appropriate time for data dissemination in an option class that NASDAQ 
believes will be most conducive to price discovery based on the trading 
characteristics of such option class. Further, the Commission believes 
that the advance notice on the NASDAQ Trader website of any change in 
the commencement of dissemination of imbalance and indicative price 
data will continue to ensure certainty with respect to the time of 
dissemination.
---------------------------------------------------------------------------

    \35\ See id.

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[[Page 28260]]

    The Commission finds that the proposed modification to the 
dissemination of the final Order Imbalance Indicator is consistent with 
the Act. Currently, any time an imbalance remains just prior to the 
opening cross, the Exchange disseminates one last Order Imbalance 
Indicator. The Exchange proposes to disseminate that final Order 
Imbalance Indicator only when the imbalance contains routable trading 
interest that is marketable against the NBBO. After the opening cross 
is executed, any non-routable interest that is not cancelled will be 
posted. As such, dissemination of this interest will be broadcast via 
the consolidated quote. The effect of this change is that the Exchange 
will not disseminate the very last Order Imbalance Indicator that it 
would otherwise have disseminated right before the opening cross when 
the imbalance only contains non-routable interest. While this change 
could have the effect of reducing the last message on imbalances that 
the Exchange currently sends immediately before the opening cross, it 
also mitigates message traffic for orders that the Exchange expects 
would post immediately thereafter. The Commission believes this change 
will not adversely affect transparency with respect to imbalance 
information immediately prior to the opening cross.
    The Commission finds that the proposed establishment of an opening 
cross following a trading halt is consistent with the Act. The Exchange 
believes that conducting an opening cross will provide a more orderly 
opening of the market after a halt, particularly to the extent that NOM 
attracts higher levels of liquidity than it did previously.\36\ The 
Commission notes that the halt cross will operate in the same manner as 
the opening cross. It is also consistent with the use of an opening 
cross following a trading halt on NASDAQ's equities platform.\37\ The 
Commission notes that similar auctions are used by other options 
markets following a trading halt.\38\ The Commission believes that the 
adoption of a halt cross is designed to provide for a fair and orderly 
re-opening of the market and contribute to the quality of executions 
following a trading halt.
---------------------------------------------------------------------------

    \36\ See id. at 18591.
    \37\ See NASDAQ Rule 4753.
    \38\ See, e.g., Securities Exchange Act Release No. 54238 (July 
28, 2006), 71 FR 44758, 44762 (August 7, 2006) (SR-NYSEArca-2006-13) 
(approving the OX Trading Platform, including trading auctions 
following halts, for NYSE Arca, Inc. (``NYSE Arca'')); Securities 
Exchange Act Release No. 59472 (February 27, 2009), 74 FR 9843, 9851 
(March 6, 2009) (SR-NYSEALTR-2008-14) (finding that NYSE Alternext 
US LLC's (now NYSE Amex LLC) rules on trading auctions and 
procedures for trading halts are closely modeled on the rules of 
NYSE Arca and consistent with the Act).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-NASDAQ-2011-037) be, and 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-11919 Filed 5-13-11; 8:45 am]
BILLING CODE 8011-01-P