Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New Market Maker Peg Order Available to Exchange Market Makers, 47472-47474 [2012-19363]
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47472
Federal Register / Vol. 77, No. 153 / Wednesday, August 8, 2012 / Notices
The Exchange also believes that the
proposed rule change is reasonable,
equitable and not unfairly
discriminatory because it would
streamline the Price List with respect to
determining the particular credit
applicable to an SLP. Specifically, the
Exchange believes that eliminating the
requirement that an SLP add liquidity of
a certain percentage of CADV for an
assigned security in the applicable
month, as well as the additional tiers
that currently correspond to such
percentages, would simplify the method
by which SLPs are provided with
credits for adding liquidity.
The Exchange believes that the rate of
$0.0021 per share (or $0.0016 per share
if a Non-Displayed Reserve Order) is
reasonable because it is consistent with
a rate that is currently available to SLPs.
The Exchange also believes that the
proposed rate is reasonable because it is
directly related to an SLP’s activity
during the month in assigned securities
(i.e., the applicable 10% and 10 million
share thresholds). In this regard, the
proposed change is intended to
incentivize SLPs to provide liquidity on
the Exchange in order to satisfy the
applicable percentage and volume
thresholds and would result in a credit
that is reasonably related to an
exchange’s market quality that is
associated with higher volumes.
The Exchange believes that the
proposed rule change is equitable and
not unfairly discriminatory because it
will apply to all SLPs on an equal and
non-discriminatory basis. All similarly
situated members on the Exchange are
subject to the same fee structure, and
access to the Exchange is offered on
terms that are not unfairly
discriminatory. In this regard, the
Exchange notes that the standard credit
is available to all SLPs. Likewise, all
SLPs are eligible to qualify for the
increased credit, which, as discussed
above, is based on whether an SLP
satisfies the applicable percentage and
volume thresholds.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues. In such
an environment, the Exchange must
continually review, and consider
adjusting, its fees and credits to remain
competitive with other exchanges. For
the reasons described above, the
Exchange believes that the proposed
rule change reflects this competitive
environment.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
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any burden on competition that is 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
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 12 of the Act and
subparagraph (f)(2) of Rule 19b–4 13
thereunder, because it establishes a due,
fee, or other charge imposed by the
NYSE.
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.
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 rulecomments@sec.gov. Please include File
Number SR–NYSE–2012–33 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSE–2012–33. 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 Web site (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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NYSE–
2012–33 and should be submitted on or
before August 29, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–19364 Filed 8–7–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67584; File No. SR–
NASDAQ–2012–066]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change, as
Modified by Amendment No. 1, To
Adopt a New Market Maker Peg Order
Available to Exchange Market Makers
August 2, 2012.
I. Introduction
On June 6, 2012, 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
adopt a new Market Maker Peg Order to
provide similar functionality as the
automated functionality provided to
market makers under Rules
14 17
12 15
U.S.C. 78s(b)(3)(A).
13 17 CFR 240.19b–4(f)(2).
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 77, No. 153 / Wednesday, August 8, 2012 / Notices
4613(a)(2)(F) and (G). The proposed rule
change was published for comment in
the Federal Register on June 20, 2012.3
The Commission received no comment
letters regarding the proposed rule
change. This order approves the
proposed rule change.
II. Background
NASDAQ is proposing to adopt a new
Market Maker Peg Order (as defined in
proposed Rule 4751(f)(15)) to provide a
similar functionality presently available
to Exchange market makers under Rules
4613(a)(2)(F) and (G).4 NASDAQ
adopted Rules 4613(a)(2)(F) and (G) as
part of an effort to address issues
uncovered by the aberrant trading that
occurred on May 6, 2010.5 According to
the Exchange, the automated quote
management functionality (‘‘AQ’’)
offered by these rules is designed to
help Exchange market makers meet the
enhanced market maker obligations
adopted post May 6, 2010,6 and avoid
execution of market maker ‘‘stub
quotes’’ in instances of aberrant
trading.7 As part of these obligations,
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3 See
Securities Exchange Act Release No. 67203
(Jun. 20, 2012), 77 FR 37086 (‘‘Notice’’). The
Commission notes that on August 2, 2012, the
Exchange submitted Amendment No. 1 to the
proposed rule change to make certain amendments
that, in part, clarified the operation of the new
Market Maker Peg Order functionality if, after entry,
the Market Maker Peg Order is priced based on the
consolidated last sale and such Market Maker Peg
Order is established as the National Best Bid or
National Best Offer.
4 NASDAQ will continue to offer the present
automated quote management functionality
provided to market makers under Rules
4613(a)(2)(F) and (G) for a period of 3 months after
the implementation of the proposed Market Maker
Peg Order. The purpose of this transition period,
during which both the present automated quote
management functionality under Rules
4163(a)(2)(F) and (G) and the Market Maker Peg
Order will operate concurrently, is to afford market
makers with the opportunity to adequately test the
new Market Maker Peg Order and migrate away
from the present automated quote management
functionality under Rules 4613(a)(2)(F) and (G).
Prior to the end of this three month period,
NASDAQ represents that it will submit a rule filing
to retire the automated quote management
functionality under Rules 4613(a)(2)(F) and (G). See
Notice, supra note 3 at 37087.
5 Securities Exchange Act Release No. 63255
(November 5, 2010), 75 FR 69484 (November 12,
2010) (SR–NASDAQ–2010–115, et al.).
6 Id.
7 For each issue in which a market maker is
registered, AQ automatically creates a quotation for
display to comply with market making obligations.
Compliant displayed quotations are thereafter
allowed to rest and are not further adjusted unless
the relationship between the quotation and its
related national best bid or national best offer, as
appropriate, shrinks to the greater of: (a) 4
percentage points, or, (b) one-quarter the applicable
percentage necessary to trigger an individual stock
trading pause as described in Rule 4120(a)(11), or
expands to within that same percentage less 0.5%,
whereupon AQ will immediately re-adjust and
display the market maker’s quote to the appropriate
designated percentage. Quotations originally
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NASDAQ requires market makers for
each stock in which they are registered
to continuously maintain a two-sided
quotation within a designated
percentage of the National Best Bid and
National Best Offer,8 as appropriate.
According to NASDAQ, AQ presents
difficulties to market makers in meeting
their obligations under Rule 15c3–5
under the Act (the ‘‘Market Access
Rule’’) 9 and Regulation SHO.10
Specifically, the current AQ
functionality offered to market makers
reprices and ‘‘refreshes’’ a market
maker’s quote when it is executed
against, without any action required by
the market maker. When a market
maker’s quote is refreshed by the
Exchange, however, the market maker
has an obligation to ensure that the
requirements of the Market Access Rule
and Regulation SHO are met. To meet
these obligations, a market maker must
actively monitor the status of its quotes
and ensure that the requirements of the
Market Access Rule and Regulation
SHO are being satisfied.
Market Maker Peg Order
In an effort to simplify market maker
compliance with the requirements of the
Market Access Rule and Regulation
SHO, NASDAQ proposes to adopt a new
order type available only to Exchange
market makers, which offers AQ-like
functionality but also allows a market
maker to comply with the requirements
of the Market Access Rule and
Regulation SHO. Specifically, NASDAQ
proposes to replace AQ functionality
with the Market Maker Peg Order. The
Market Maker Peg Order would be a
one-sided limit order and similar to
other peg orders available to market
participants in that the order is tied or
‘‘pegged’’ to a certain price,11 but it
would not be eligible for routing
pursuant Rule 4758 and would always
be displayed and attributable (as
defined in Rule 4751). The Market
Maker Peg Order would be limited to
market makers and would have its price
automatically set and adjusted, both
upon entry and any time thereafter, in
order to comply with the Exchange’s
entered by market makers are allowed to move
freely towards the national best bid or national best
offer, as appropriate, for potential execution. In the
event of an execution against a System (as defined
in Rule 4751(a)) created compliant quotation, the
market maker’s quote is refreshed by AQ on the
executed side of the market at the applicable
designated percentage away from the then national
best bid (offer), or if no national best bid (offer), the
last reported sale. Rule 4613(F) & (G).
8 As defined by Regulation NMS Rule 600(b)(42).
17 CFR 242.600.
9 See Notice, supra note 3 at 37087.
10 17 CFR 242.200 through 204.
11 Rule 4751(f)(4) defines Pegged Orders.
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47473
rules regarding market maker quotation
requirements and obligations.12 It is
expected that market makers will
perform the necessary checks to comply
with Regulation SHO, as discussed
above, prior to entry of a Market Maker
Peg Order. Upon entry and at any time
the order exceeds either the Defined
Limit, as described in Rule
4613(a)(2)(E), or moves a specified
number of percentage points away from
the Designated Percentage towards the
then current National Best Bid or
National Best Offer, as described in Rule
4613(a)(2)(F), the Market Maker Peg
Order would be priced by the Exchange
at the Designated Percentage 13 away
from the then current National Best Bid
and National Best Offer, or, if no
National Best Bid or National Best Offer,
to the Designated Percentage away from
the last reported sale from the
responsible single plan processor.
According to NASDAQ, in the absence
of a National Best Bid or National Best
Offer and last reported sale, the order
will be cancelled or rejected.
Adjustment to the Designated
Percentage is designed to avoid an
execution against a Market Maker Peg
Order that would initiate a single stock
circuit breaker. In the event of an
execution against a Market Maker Peg
Order that reduces the size of the
Market Maker Peg Order below one
round lot, the market maker would need
to enter a new order, after performing
the regulatory checks discussed above,
to satisfy their obligations under Rule
4613.14 In the event that pricing the
Market Maker Peg Order at the
Designated Percentage away from the
then current National Best Bid and
National Best Offer, or, if no National
Best Bid or National Best Offer, to the
Designated Percentage away from the
last reported sale from the responsible
single plan processor would result in
the order exceeding its limit price, the
order will be cancelled or rejected.
NASDAQ is also proposing to allow a
market maker to designate an offset
more aggressive (i.e., smaller) than the
Designated Percentage for any given
Market Maker Peg Order. This
functionality will allow a market maker
12 The Market Maker Peg Order is one-sided so a
market maker seeking to use Market Maker Peg
Orders to comply with the Exchange’s rules
regarding market maker quotation requirements
would need to submit both a bid and an offer using
the order type.
13 The Designated Percentage is the individual
stock pause trigger percentage under Rule
4120(a)(11) (or comparable rule of another
exchange) less two (2) percentage points. See Rule
4613(a)(2)(D).
14 Rule 4613 generally sets forth NASDAQ market
maker requirements, which include quotation and
pricing obligations, and the firm quote obligation.
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Federal Register / Vol. 77, No. 153 / Wednesday, August 8, 2012 / Notices
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to quote at price levels that are closer to
the National Best Bid and National Best
Offer if it elects to do so. To use this
functionality, a market maker must
designate the desired offset upon order
entry.15 Thereafter and unlike the
default 16 Market Maker Peg Order, a
Market Maker Peg Order with a market
maker-designated offset will have its
price automatically adjusted on a tickby-tick basis by the System to maintain
the market maker-designated offset from
the National Best Bid or National Best
Offer until the order is executed or
cancelled.17 In the absence of a National
Best Bid or National Best Offer, Market
Maker Peg Orders with a market makerdesignated offset will be cancelled or
rejected. In the event that pricing the
Market Maker Peg Order at the market
maker-designated offset away from the
then current National Best Bid and
National Best Offer would result in the
order exceeding its limit price, the order
will be cancelled or rejected.18
NASDAQ claims that this order-based
approach is superior in terms of the ease
in complying with the requirements of
the Market Access Rule and Regulation
SHO while also providing similar quote
adjusting functionality to its market
makers.19 NASDAQ also states that
market makers would have control of
order origination, as required by the
Market Access Rule, while also allowing
market makers to make marking and
locate determinations prior to order
entry, as required by Regulation SHO.
The Exchange claims that this will
allow market makers to fully comply
15 If a market maker wishes, it can designate a
more aggressive bid while using the Defined
Percentage and Defined Limit for its offer, or vice
versa.
16 In the absence of an offset designation, a
Market Maker Peg Order will default to using the
Defined Percentage and Defined Limit, and the
repricing process whereby, upon reaching the
Defined Limit, the price of a Market Maker Peg
Order bid or offer will be adjusted by the System
to the Designated Percentage away from the then
current National Best Bid or National Best Offer, or,
if no National Best Bid or National Best Offer, to
the Designated Percentage away from the last
reported sale from the responsible single plan
processor.
17 Market Maker Peg Orders with a market makerdesignated offset may be able to qualify as bona-fide
market making for purposes of Regulation SHO,
depending on the facts and circumstances. A
market maker entering such an order must consider
the factors set forth by the Commission in
determining whether reliance on the exception from
the ‘‘locate’’ requirement of Rule 203 for bona-fide
market making is appropriate with respect to the
particular Market Maker Peg Order and its
designated offset. See supra note 11.
18 The Market Maker Peg Order will be accepted
and executable during System hours. During pre
and post-market hours, the wider Designated
Percentage and Defined Limit associated with the
9:30 a.m.–9:45 a.m. and 3:35 p.m.–4:00 p.m. periods
under Rule 4613(a)(2)(D) and (E) will be applied.
19 See Notice, supra note 3 at 37088.
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with the requirements of the Market
Access Rule and Regulation SHO, as
they would when placing any order,
while also meeting their Exchange
market making obligations.20
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.21 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,22 which requires,
among other things, the rules of an
exchange 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 finds
that the proposed rule change also is
designed to support the principles of
Section 11A(a)(1) 23 of the Act in that it
seeks to assure fair competition among
brokers and dealers and among
exchange markets.
The Commission finds that the
Exchange’s proposal is consistent with
the Act because it provides a means
through which market makers may meet
their minimum quoting requirements,
which may assist in the maintenance of
fair and orderly markets, provide
additional liquidity to the Exchange,
and prevent excessive volatility. At the
same time, the proposal is reasonably
designed to assist market makers in
complying with the regulatory
requirements of the Market Access Rule
and Regulation SHO. The Commission
notes, however, that the Market Maker
Peg Order, like the current AQ system,
does not ensure that the market maker
is satisfying the requirements of the
Market Access Rule or Regulation SHO,
including the satisfaction of the locate
requirement of Rule 203(b)(1) or an
exception thereto. The Commission also
notes that, in the event a Market Maker
Peg Order is executed against such that
the Market Maker Peg Order is reduced
in size to below one round lot, the
market maker would need to perform
the necessary regulatory checks
pursuant to the Market Access Rule and
Regulation SHO prior to entering a new
Market Maker Peg Order.
20 See
id.
approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
22 15 U.S.C. 78f(b)(5).
23 15 U.S.C. 78k–1(a)(1).
21 In
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The Commission also believes that
providing Exchange market makers with
a transition period, during which they
may adequately test the new
functionality of the Market Maker Peg
Order, will serve to minimize the
potential market impact caused by the
implementation of that order type. In
addition, by allowing market makers to
enter a Market Maker Peg Order that is
priced more aggressively than the
Designated Percentage, the proposed
rules are reasonably designed to provide
that quotations submitted by market
makers to the Exchange, and displayed
to market participants, bear some
relationship to the prevailing market
price.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,24 that the
proposed rule change, as modified by
Amendment No. 1, (SR–NASDAQ–
2012–066) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–19363 Filed 8–7–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67581; File No. SR–CBOE–
2012–074]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Establish a Rule
Regarding Records of Written
Complaints for the CBOE Stock
Exchange
August 2, 2012.
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 July 31,
2012, Chicago Board Options Exchange,
Incorporated (the ‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (‘‘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
24 15
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.
25 17
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Agencies
[Federal Register Volume 77, Number 153 (Wednesday, August 8, 2012)]
[Notices]
[Pages 47472-47474]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19363]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67584; File No. SR-NASDAQ-2012-066]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change, as Modified by Amendment No. 1, To
Adopt a New Market Maker Peg Order Available to Exchange Market Makers
August 2, 2012.
I. Introduction
On June 6, 2012, 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 adopt a new Market Maker Peg Order to provide
similar functionality as the automated functionality provided to market
makers under Rules
[[Page 47473]]
4613(a)(2)(F) and (G). The proposed rule change was published for
comment in the Federal Register on June 20, 2012.\3\ The Commission
received no comment letters regarding the proposed rule change. 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. 67203 (Jun. 20,
2012), 77 FR 37086 (``Notice''). The Commission notes that on August
2, 2012, the Exchange submitted Amendment No. 1 to the proposed rule
change to make certain amendments that, in part, clarified the
operation of the new Market Maker Peg Order functionality if, after
entry, the Market Maker Peg Order is priced based on the
consolidated last sale and such Market Maker Peg Order is
established as the National Best Bid or National Best Offer.
---------------------------------------------------------------------------
II. Background
NASDAQ is proposing to adopt a new Market Maker Peg Order (as
defined in proposed Rule 4751(f)(15)) to provide a similar
functionality presently available to Exchange market makers under Rules
4613(a)(2)(F) and (G).\4\ NASDAQ adopted Rules 4613(a)(2)(F) and (G) as
part of an effort to address issues uncovered by the aberrant trading
that occurred on May 6, 2010.\5\ According to the Exchange, the
automated quote management functionality (``AQ'') offered by these
rules is designed to help Exchange market makers meet the enhanced
market maker obligations adopted post May 6, 2010,\6\ and avoid
execution of market maker ``stub quotes'' in instances of aberrant
trading.\7\ As part of these obligations, NASDAQ requires market makers
for each stock in which they are registered to continuously maintain a
two-sided quotation within a designated percentage of the National Best
Bid and National Best Offer,\8\ as appropriate. According to NASDAQ, AQ
presents difficulties to market makers in meeting their obligations
under Rule 15c3-5 under the Act (the ``Market Access Rule'') \9\ and
Regulation SHO.\10\ Specifically, the current AQ functionality offered
to market makers reprices and ``refreshes'' a market maker's quote when
it is executed against, without any action required by the market
maker. When a market maker's quote is refreshed by the Exchange,
however, the market maker has an obligation to ensure that the
requirements of the Market Access Rule and Regulation SHO are met. To
meet these obligations, a market maker must actively monitor the status
of its quotes and ensure that the requirements of the Market Access
Rule and Regulation SHO are being satisfied.
---------------------------------------------------------------------------
\4\ NASDAQ will continue to offer the present automated quote
management functionality provided to market makers under Rules
4613(a)(2)(F) and (G) for a period of 3 months after the
implementation of the proposed Market Maker Peg Order. The purpose
of this transition period, during which both the present automated
quote management functionality under Rules 4163(a)(2)(F) and (G) and
the Market Maker Peg Order will operate concurrently, is to afford
market makers with the opportunity to adequately test the new Market
Maker Peg Order and migrate away from the present automated quote
management functionality under Rules 4613(a)(2)(F) and (G). Prior to
the end of this three month period, NASDAQ represents that it will
submit a rule filing to retire the automated quote management
functionality under Rules 4613(a)(2)(F) and (G). See Notice, supra
note 3 at 37087.
\5\ Securities Exchange Act Release No. 63255 (November 5,
2010), 75 FR 69484 (November 12, 2010) (SR-NASDAQ-2010-115, et al.).
\6\ Id.
\7\ For each issue in which a market maker is registered, AQ
automatically creates a quotation for display to comply with market
making obligations. Compliant displayed quotations are thereafter
allowed to rest and are not further adjusted unless the relationship
between the quotation and its related national best bid or national
best offer, as appropriate, shrinks to the greater of: (a) 4
percentage points, or, (b) one-quarter the applicable percentage
necessary to trigger an individual stock trading pause as described
in Rule 4120(a)(11), or expands to within that same percentage less
0.5%, whereupon AQ will immediately re-adjust and display the market
maker's quote to the appropriate designated percentage. Quotations
originally entered by market makers are allowed to move freely
towards the national best bid or national best offer, as
appropriate, for potential execution. In the event of an execution
against a System (as defined in Rule 4751(a)) created compliant
quotation, the market maker's quote is refreshed by AQ on the
executed side of the market at the applicable designated percentage
away from the then national best bid (offer), or if no national best
bid (offer), the last reported sale. Rule 4613(F) & (G).
\8\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR
242.600.
\9\ See Notice, supra note 3 at 37087.
\10\ 17 CFR 242.200 through 204.
---------------------------------------------------------------------------
Market Maker Peg Order
In an effort to simplify market maker compliance with the
requirements of the Market Access Rule and Regulation SHO, NASDAQ
proposes to adopt a new order type available only to Exchange market
makers, which offers AQ-like functionality but also allows a market
maker to comply with the requirements of the Market Access Rule and
Regulation SHO. Specifically, NASDAQ proposes to replace AQ
functionality with the Market Maker Peg Order. The Market Maker Peg
Order would be a one-sided limit order and similar to other peg orders
available to market participants in that the order is tied or
``pegged'' to a certain price,\11\ but it would not be eligible for
routing pursuant Rule 4758 and would always be displayed and
attributable (as defined in Rule 4751). The Market Maker Peg Order
would be limited to market makers and would have its price
automatically set and adjusted, both upon entry and any time
thereafter, in order to comply with the Exchange's rules regarding
market maker quotation requirements and obligations.\12\ It is expected
that market makers will perform the necessary checks to comply with
Regulation SHO, as discussed above, prior to entry of a Market Maker
Peg Order. Upon entry and at any time the order exceeds either the
Defined Limit, as described in Rule 4613(a)(2)(E), or moves a specified
number of percentage points away from the Designated Percentage towards
the then current National Best Bid or National Best Offer, as described
in Rule 4613(a)(2)(F), the Market Maker Peg Order would be priced by
the Exchange at the Designated Percentage \13\ away from the then
current National Best Bid and National Best Offer, or, if no National
Best Bid or National Best Offer, to the Designated Percentage away from
the last reported sale from the responsible single plan processor.
According to NASDAQ, in the absence of a National Best Bid or National
Best Offer and last reported sale, the order will be cancelled or
rejected. Adjustment to the Designated Percentage is designed to avoid
an execution against a Market Maker Peg Order that would initiate a
single stock circuit breaker. In the event of an execution against a
Market Maker Peg Order that reduces the size of the Market Maker Peg
Order below one round lot, the market maker would need to enter a new
order, after performing the regulatory checks discussed above, to
satisfy their obligations under Rule 4613.\14\ In the event that
pricing the Market Maker Peg Order at the Designated Percentage away
from the then current National Best Bid and National Best Offer, or, if
no National Best Bid or National Best Offer, to the Designated
Percentage away from the last reported sale from the responsible single
plan processor would result in the order exceeding its limit price, the
order will be cancelled or rejected.
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\11\ Rule 4751(f)(4) defines Pegged Orders.
\12\ The Market Maker Peg Order is one-sided so a market maker
seeking to use Market Maker Peg Orders to comply with the Exchange's
rules regarding market maker quotation requirements would need to
submit both a bid and an offer using the order type.
\13\ The Designated Percentage is the individual stock pause
trigger percentage under Rule 4120(a)(11) (or comparable rule of
another exchange) less two (2) percentage points. See Rule
4613(a)(2)(D).
\14\ Rule 4613 generally sets forth NASDAQ market maker
requirements, which include quotation and pricing obligations, and
the firm quote obligation.
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NASDAQ is also proposing to allow a market maker to designate an
offset more aggressive (i.e., smaller) than the Designated Percentage
for any given Market Maker Peg Order. This functionality will allow a
market maker
[[Page 47474]]
to quote at price levels that are closer to the National Best Bid and
National Best Offer if it elects to do so. To use this functionality, a
market maker must designate the desired offset upon order entry.\15\
Thereafter and unlike the default \16\ Market Maker Peg Order, a Market
Maker Peg Order with a market maker-designated offset will have its
price automatically adjusted on a tick-by-tick basis by the System to
maintain the market maker-designated offset from the National Best Bid
or National Best Offer until the order is executed or cancelled.\17\ In
the absence of a National Best Bid or National Best Offer, Market Maker
Peg Orders with a market maker-designated offset will be cancelled or
rejected. In the event that pricing the Market Maker Peg Order at the
market maker-designated offset away from the then current National Best
Bid and National Best Offer would result in the order exceeding its
limit price, the order will be cancelled or rejected.\18\
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\15\ If a market maker wishes, it can designate a more
aggressive bid while using the Defined Percentage and Defined Limit
for its offer, or vice versa.
\16\ In the absence of an offset designation, a Market Maker Peg
Order will default to using the Defined Percentage and Defined
Limit, and the repricing process whereby, upon reaching the Defined
Limit, the price of a Market Maker Peg Order bid or offer will be
adjusted by the System to the Designated Percentage away from the
then current National Best Bid or National Best Offer, or, if no
National Best Bid or National Best Offer, to the Designated
Percentage away from the last reported sale from the responsible
single plan processor.
\17\ Market Maker Peg Orders with a market maker-designated
offset may be able to qualify as bona-fide market making for
purposes of Regulation SHO, depending on the facts and
circumstances. A market maker entering such an order must consider
the factors set forth by the Commission in determining whether
reliance on the exception from the ``locate'' requirement of Rule
203 for bona-fide market making is appropriate with respect to the
particular Market Maker Peg Order and its designated offset. See
supra note 11.
\18\ The Market Maker Peg Order will be accepted and executable
during System hours. During pre and post-market hours, the wider
Designated Percentage and Defined Limit associated with the 9:30
a.m.-9:45 a.m. and 3:35 p.m.-4:00 p.m. periods under Rule
4613(a)(2)(D) and (E) will be applied.
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NASDAQ claims that this order-based approach is superior in terms
of the ease in complying with the requirements of the Market Access
Rule and Regulation SHO while also providing similar quote adjusting
functionality to its market makers.\19\ NASDAQ also states that market
makers would have control of order origination, as required by the
Market Access Rule, while also allowing market makers to make marking
and locate determinations prior to order entry, as required by
Regulation SHO. The Exchange claims that this will allow market makers
to fully comply with the requirements of the Market Access Rule and
Regulation SHO, as they would when placing any order, while also
meeting their Exchange market making obligations.\20\
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\19\ See Notice, supra note 3 at 37088.
\20\ 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.\21\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\22\ which
requires, among other things, the rules of an exchange 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 finds that the proposed rule change also is designed to
support the principles of Section 11A(a)(1) \23\ of the Act in that it
seeks to assure fair competition among brokers and dealers and among
exchange markets.
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\21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
\23\ 15 U.S.C. 78k-1(a)(1).
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The Commission finds that the Exchange's proposal is consistent
with the Act because it provides a means through which market makers
may meet their minimum quoting requirements, which may assist in the
maintenance of fair and orderly markets, provide additional liquidity
to the Exchange, and prevent excessive volatility. At the same time,
the proposal is reasonably designed to assist market makers in
complying with the regulatory requirements of the Market Access Rule
and Regulation SHO. The Commission notes, however, that the Market
Maker Peg Order, like the current AQ system, does not ensure that the
market maker is satisfying the requirements of the Market Access Rule
or Regulation SHO, including the satisfaction of the locate requirement
of Rule 203(b)(1) or an exception thereto. The Commission also notes
that, in the event a Market Maker Peg Order is executed against such
that the Market Maker Peg Order is reduced in size to below one round
lot, the market maker would need to perform the necessary regulatory
checks pursuant to the Market Access Rule and Regulation SHO prior to
entering a new Market Maker Peg Order.
The Commission also believes that providing Exchange market makers
with a transition period, during which they may adequately test the new
functionality of the Market Maker Peg Order, will serve to minimize the
potential market impact caused by the implementation of that order
type. In addition, by allowing market makers to enter a Market Maker
Peg Order that is priced more aggressively than the Designated
Percentage, the proposed rules are reasonably designed to provide that
quotations submitted by market makers to the Exchange, and displayed to
market participants, bear some relationship to the prevailing market
price.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change, as modified by Amendment No. 1,
(SR-NASDAQ-2012-066) be, and hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19363 Filed 8-7-12; 8:45 am]
BILLING CODE 8011-01-P