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]

Download as PDF wreier-aviles on DSK7SPTVN1PROD with NOTICES 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 VerDate Mar<15>2010 15:11 Aug 07, 2012 Jkt 226001 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). PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\08AUN1.SGM 08AUN1 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, wreier-aviles on DSK7SPTVN1PROD with NOTICES 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 VerDate Mar<15>2010 15:11 Aug 07, 2012 Jkt 226001 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. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 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. E:\FR\FM\08AUN1.SGM 08AUN1 47474 Federal Register / Vol. 77, No. 153 / Wednesday, August 8, 2012 / Notices wreier-aviles on DSK7SPTVN1PROD with NOTICES 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. VerDate Mar<15>2010 15:11 Aug 07, 2012 Jkt 226001 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 PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 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 E:\FR\FM\08AUN1.SGM 08AUN1

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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
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