Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Options Execution Algorithm With Priority Overlays, 79539-79541 [2013-31129]
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79539
Federal Register / Vol. 78, No. 250 / Monday, December 30, 2013 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–31130 Filed 12–27–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71173; File No. SR–
NASDAQ–2013–156]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Adopt a
New Options Execution Algorithm With
Priority Overlays
December 23, 2013.
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 December
16, 2013, The NASDAQ Stock Market
LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘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 amend
Chapter VI, Section 10, of the Rules of
the NASDAQ Options Market (‘‘NOM’’).
Specifically, NASDAQ proposes to add
an additional execution algorithm and
priority overlays to govern the priority
of orders, as explained more fully
below.
The text of the proposed rule change
is below; proposed new language is in
italics.
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*
*
*
*
Chapter VI
*
*
maindgalligan on DSK5TPTVN1PROD with NOTICES
Sec. 10
*
Trading Systems
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*
Book Processing
System orders shall be executed
through the Nasdaq Book Process set
forth below:
(1) Execution Algorithm—The
Exchange will determine to apply, for
each option, one of the following
execution algorithms described in
48 See
17 CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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paragraphs (A) or (B). The Exchange
will issue an Options Alert specifying
which execution algorithm will govern
which options any time it is modified.
(A) Price/Time—The System shall
execute trading interest within the
System in price/time priority, meaning
it will execute all trading interest at the
best price level within the System
before executing trading interest at the
next best price. Within each price level,
if there are two or more quotes or orders
at the best price, trading interest will be
executed in time priority.
(B) Size Pro-Rata—The System shall
execute trading interest within the
System in price priority, meaning it will
execute all trading interest at the best
price level within the System before
executing trading interest at the next
best price. Within each price level, if
there are two or more quotes or orders
at the best price, trading interest will be
executed based on the size of each
Participant’s quote or order as a
percentage of the total size of all orders
and quotes resting at that price. If the
result is not a whole number, it will be
rounded down to the nearest whole
number. If there are residual contracts
remaining after rounding, such
contracts will be distributed one
contract at a time to the remaining
Participants in time priority.
(C) Priority Overlays Applicable to
Size Pro-Rata Execution Algorithm: The
Exchange will apply the following
designated Participant priority overlays,
which are always in effect when the Size
Pro-Rata execution algorithm is in
effect.
(i) Public Customer Priority: the
highest bid and lowest offer shall have
priority except that Public Customer
orders shall have priority over nonPublic Customer orders at the same
price. If there are two or more Public
Customer orders for the same options
series at the same price, priority shall be
afforded to such Public Customer orders
in the sequence in which they are
received by the System. For purposes of
this Rule, a Public Customer order does
not include a Professional Order.
(ii) Market Maker Priority: After all
Public Customer orders have been fully
executed, Options Market Makers shall
have priority over all other Participant
orders at the same price. If there are two
or more Options Market Maker quotes
and orders for the same options series
at the same price, those shall be
executed based on the Size Pro-Rata
execution algorithm. If there are
contracts remaining after all Market
Maker interest has been fully executed,
such contracts shall be executed based
on the Size Pro-Rata execution
algorithm.
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(2)–(7) No change.
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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
NOM operates as an all-electronic
system (‘‘System’’ or ‘‘Trading System’’)
with no physical trading floor and
provides for the electronic display and
execution of orders in price/time
priority without regard to the status of
the entities that are entering orders.
NOM now seeks to introduce a different
priority rule in certain options in order
to create additional incentives for firms
to provide liquidity on NOM.
Currently, Chapter VI, Section 10,
Book Processing, provides that the
System will have a single execution
algorithm based on price/time priority.
The System and rules provide for the
ranking, display, and execution of all
orders in price/time priority without
regard to the status of the entity entering
an order. For each order, among equallypriced or better-priced trading interest,
the System currently executes against
available contra-side displayed contract
amounts in full, in price/time priority.
At this time, the Exchange proposes to
amend Chapter VI, Section 10, to
provide for a Size Pro-Rata execution
algorithm. In order to make clear that
only one of the two execution
algorithms is applicable to a particular
option, NASDAQ proposes to add
introductory language to Section 10(1)
to state that the Exchange will
determine to apply, for each option, one
of the execution algorithms described in
subparagraphs (A) 3 or (B). The
3 NASDAQ is also proposing to amend
subparagraph (A) to provide that, respecting the
price/time execution algorithm, within each price
level, if there are two or more quotes or orders at
the best price, trading interest will be executed in
time priority. This is intended to be clearer and
match the new language in subparagraph (B).
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maindgalligan on DSK5TPTVN1PROD with NOTICES
Exchange will issue an Options Alert
specifying which execution algorithm
will govern which options any time a
change is made.
Further, NASDAQ proposes to adopt
new subparagraph (B) to provide that
when the Size Pro-Rata execution
algorithm is in effect the System shall
execute trading interest in price priority,
meaning it will execute all trading
interest at the best price level within the
System before executing trading interest
at the next best price. Within each price
level, if there are two or more quotes or
orders at the best price, trading interest
will be executed based on the size of
each Participant’s quote or order as a
percentage of the total size of all orders
and quotes resting at that price. If this
is not a whole number, it will be
rounded down to the nearest whole
number. If there are residual contracts
remaining after rounding, such contracts
will be distributed one contract at a time
to the remaining Participants in time
priority.4 The Size Pro-Rata execution
algorithm will, initially, always operate
with the priority overlays, as described
further below.
Example 1—rounding approach Order 1:
Buy 10 contracts for 1.84, Non-Market Maker
broker-dealer
Order 2: Buy 10 contracts for 1.84, Public
Customer
Quote: 1.84 (70) x 1.86 (10) MM1
Order 3: Buy 10 contracts for 1.84, Market
Maker
Market: 1.84 (100 contracts total) x 1.86 (10
contracts)
Sell order received: Sell 25 contracts at 1.84
Execution:
Order 1 represents 10 of 100 (10%) total
contracts at 1.84.
10% of 25 contracts (which is the sell order)
execute = 2.5, rounds down to 2 contracts.
Order 2 represents 10 of 100 (10%) total
contracts at 1.84.
10% of 25 contracts (which is the sell order)
execute = 2.5, rounds down to 2 contracts.
MM1’s quote represents 70 of 100 (70%) total
contracts at 1.84.
Again, 70% of 25 contracts execute = 17.5,
rounds down to 17 contracts.
Order 3 represents 10 of 100 (10%) total
contracts at 1.84.
10% of 25 contracts (which is the sell order)
execute = 2.5, rounds down to 2 contracts.
Total executed: 23. There are 2 residual
contracts remaining from the 25 contract
sell order.
The remaining 2 contracts are allocated one
at a time based on time as follows:
Order 1 receives 1 additional residual
contract.
Order 2 receives 1 additional residual
contract.
The 25 contract sell order is now
completely executed.
4 This is substantially similar to BX Options,
Chapter VI, Section 10(1)(B).
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In addition, NASDAQ proposes to
adopt two priority overlays. The new
subparagraph (C), Priority Overlays
Applicable to Size Pro-Rata Execution
Algorithm, will provide that the
Exchange may apply these priority
overlays. NASDAQ plans to implement
the Size Pro-Rata execution algorithm
with both the Public Customer and
Market Maker priority overlays.
The first priority overlay, Public
Customer Priority, is proposed to be
subparagraph (1)(C)(i). Under this
priority overlay, interest at the highest
bid and lowest offer shall have priority
except that Public Customer orders shall
have priority over non-Public Customer
orders at the same price. If there are two
or more Public Customer orders for the
same options series at the same price,
priority shall be afforded to such Public
Customer orders in the sequence in
which they are received by the System.
For purposes of this Rule, a Public
Customer order does not include a
Professional Order. This is substantially
similar to BX Options, Chapter VI,
Section 10.
The second proposed priority overlay
is contained in subparagraph (1)(C)(ii),
Market Maker Priority. Under this
priority overlay, the highest bid and
lowest offer shall have priority except
that Options Market Maker orders, after
all Public Customer orders have been
fully executed in time priority, shall
have priority over all other Participant
orders at the same price. The Public
Customer priority is always a part of the
Market Maker Priority overlay and both
overlays will always apply to the Size
Pro-Rata execution algorithm initially. If
there are two or more Options Market
Maker quotes and orders for the same
options series at the same price, those
orders shall be executed based on the
Size Pro-Rata execution algorithm. If
there are contracts remaining after all
Market Maker interest has been fully
executed (meaning, Non-Public
Customer and Non-Market Maker), such
contracts shall be executed based on the
Size Pro-Rata execution algorithm.5
The following is an example of the
Public Customer and Market Maker
priority overlays applied to the
proposed Size Pro-Rata execution
algorithm:
Example 2:
Order 1: Buy 10 contracts for 1.84, Non-MM
broker-dealer
Order 2: Buy 10 contracts for 1.84, Public
Customer
Quote MM1: 1.84 (10) x 1.86 (10)
Order 3: Buy MM 1.84 (10)
Sell order received: Sell 21 contracts at 1.84
5 This is substantially similar to BX Options,
Chapter VI, Section 10(1)(C).
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Execution:
Order 2 allocated 10 contracts because of
Public Customer priority
Quote MM1 represents 10 of 20 (50%) total
MM contracts at 1.84. 50% of 11 contracts
to execute = 5.5, rounds down to 5
contracts.
Order 3 represents 10 of 20 (50%) total MM
contracts at 1.84. 50% of 11 contracts to
execute = 5.5, rounds down to 5 contracts.
Remaining 1 contract is allocated to MM1
based on time among MMs.
Order 1 is not executed because Market
Makers have priority over non-Market
Maker broker-dealers. Order 1 would only
be executed if all interest at the Public
Customer priority level and the Market
Maker level was first completely executed.
In summary, this proposed rule
change will allow for a different
execution algorithm for NOM. To be
clear, two different execution algorithms
will not operate in the same option. In
addition, when the Size Pro-Rata
execution algorithm is selected by
NASDAQ, the proposed new priority
overlays will be applied first as part of
the execution algorithm used to allocate
the order. These additional priority
overlays are Public Customer priority
and Market Maker priority, which will
only apply to the Size Pro-Rata
execution algorithm. NASDAQ notes
that the execution algorithm will be
selected and communicated by
NASDAQ to NOM Participants. The
Public Customer and Market Maker
priority overlays will always operate
with the Size Pro-Rata execution
algorithm.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 6 in general, and furthers the
objectives of Section 6(b)(5) of the Act 7
in particular, in that it is designed to
promote just and equitable principles of
trade and to protect investors and the
public interest, because it will provide
an additional execution algorithm with
priority overlays on NOM. This
additional execution algorithm with
priority overlays should provide
Participants with additional choices
among the many competing exchanges
with regard to their execution needs and
strategies, which should promote just
and equitable principles of trade. The
Exchange believes that adding this
flexibility to its rules will allow for
greater customization, resulting in
enhanced service to its customers and
users, which would continue to be a
purely objective method for allocating
option trades. The Exchange is seeking
to create additional incentives for firms
6 15
7 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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maindgalligan on DSK5TPTVN1PROD with NOTICES
to provide liquidity on NOM. The
Exchange believes that, while the price/
time execution algorithm encourages
liquidity providers to set the price, the
Size Pro-Rata execution algorithm
encourages liquidity providers to add
size to a bid/offer at a particular price,
even if that Participant did not set the
price. Rewarding liquidity providers
who add size should encourage larger
displayed markets, which should, in
turn, benefit and protect investors and
the public interest. The Exchange
believes that the public customer
priority overlay is designed to promote
just and equitable principles of trade
and to protect investors and the public
interest, because it recognizes the
unique status of customers in the
marketplace and the role their orders
play in price competition and adding
depth to the marketplace. The Exchange
believes that the market maker priority
overlay is designed to promote just and
equitable principles of trade and to
protect investors and the public interest,
because it strikes a reasonable balance
between encouraging vigorous price
competition and rewarding market
makers for their unique obligations.8
Overall, the overlays represent a careful
balancing by the Exchange of the
rewards and obligations of various types
of market participants.
With respect to the proposed language
in subparagraph (A) respecting the
price/time execution algorithm, the
Exchange believes that the clarification
(that within each price level, if there are
two or more quotes or orders at the best
price, trading interest will be executed
in time priority) is designed to promote
just and equitable principles of trade
and to protect investors and the public
interest by making the rule clearer and
structured in a way that is user-friendly.
(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. With respect
to inter-market competition, the
proposal should enhance NOM’s
competitive position, as NOM competes
vigorously with many other options
exchanges. With respect to intra-market
competition, the Exchange believes that
the proposal will encourage liquidity
providers to compete based on the size
of their bids/offers. The Exchange does
not believe that this will impose a
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act, because the size
8 See
NOM Rules, Chapter VII, Sections 5 and 6.
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pro-rata allocation algorithms are
prevalent on options exchanges, and
liquidity providers can also choose to
operate on price/time exchanges
instead.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(ii) of the Act 9 and
subparagraph (f)(6) of Rule 19b–4
thereunder.10
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: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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 (http://www.sec.gov/
rules/sro.shtml) or
Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2013–156 on the subject line.
U.S.C. 78s(b)(3)(a)(ii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
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–NASDAQ–2013–156. 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 (http://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–
NASDAQ–2013–156 and should be
submitted on or before January 21, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–31129 Filed 12–27–13; 8:45 am]
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CFR 200.30–3(a)(12).
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Agencies
[Federal Register Volume 78, Number 250 (Monday, December 30, 2013)]
[Notices]
[Pages 79539-79541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31129]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71173; File No. SR-NASDAQ-2013-156]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt a New Options Execution Algorithm With Priority Overlays
December 23, 2013.
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 December 16, 2013, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Chapter VI, Section 10, of the Rules
of the NASDAQ Options Market (``NOM''). Specifically, NASDAQ proposes
to add an additional execution algorithm and priority overlays to
govern the priority of orders, as explained more fully below.
The text of the proposed rule change is below; proposed new
language is in italics.
* * * * *
Chapter VI Trading Systems
* * * * *
Sec. 10 Book Processing
System orders shall be executed through the Nasdaq Book Process set
forth below:
(1) Execution Algorithm--The Exchange will determine to apply, for
each option, one of the following execution algorithms described in
paragraphs (A) or (B). The Exchange will issue an Options Alert
specifying which execution algorithm will govern which options any time
it is modified.
(A) Price/Time--The System shall execute trading interest within
the System in price/time priority, meaning it will execute all trading
interest at the best price level within the System before executing
trading interest at the next best price. Within each price level, if
there are two or more quotes or orders at the best price, trading
interest will be executed in time priority.
(B) Size Pro-Rata--The System shall execute trading interest within
the System in price priority, meaning it will execute all trading
interest at the best price level within the System before executing
trading interest at the next best price. Within each price level, if
there are two or more quotes or orders at the best price, trading
interest will be executed based on the size of each Participant's quote
or order as a percentage of the total size of all orders and quotes
resting at that price. If the result is not a whole number, it will be
rounded down to the nearest whole number. If there are residual
contracts remaining after rounding, such contracts will be distributed
one contract at a time to the remaining Participants in time priority.
(C) Priority Overlays Applicable to Size Pro-Rata Execution
Algorithm: The Exchange will apply the following designated Participant
priority overlays, which are always in effect when the Size Pro-Rata
execution algorithm is in effect.
(i) Public Customer Priority: the highest bid and lowest offer
shall have priority except that Public Customer orders shall have
priority over non-Public Customer orders at the same price. If there
are two or more Public Customer orders for the same options series at
the same price, priority shall be afforded to such Public Customer
orders in the sequence in which they are received by the System. For
purposes of this Rule, a Public Customer order does not include a
Professional Order.
(ii) Market Maker Priority: After all Public Customer orders have
been fully executed, Options Market Makers shall have priority over all
other Participant orders at the same price. If there are two or more
Options Market Maker quotes and orders for the same options series at
the same price, those shall be executed based on the Size Pro-Rata
execution algorithm. If there are contracts remaining after all Market
Maker interest has been fully executed, such contracts shall be
executed based on the Size Pro-Rata execution algorithm.
(2)-(7) No change.
* * * * *
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
NOM operates as an all-electronic system (``System'' or ``Trading
System'') with no physical trading floor and provides for the
electronic display and execution of orders in price/time priority
without regard to the status of the entities that are entering orders.
NOM now seeks to introduce a different priority rule in certain options
in order to create additional incentives for firms to provide liquidity
on NOM.
Currently, Chapter VI, Section 10, Book Processing, provides that
the System will have a single execution algorithm based on price/time
priority. The System and rules provide for the ranking, display, and
execution of all orders in price/time priority without regard to the
status of the entity entering an order. For each order, among equally-
priced or better-priced trading interest, the System currently executes
against available contra-side displayed contract amounts in full, in
price/time priority.
At this time, the Exchange proposes to amend Chapter VI, Section
10, to provide for a Size Pro-Rata execution algorithm. In order to
make clear that only one of the two execution algorithms is applicable
to a particular option, NASDAQ proposes to add introductory language to
Section 10(1) to state that the Exchange will determine to apply, for
each option, one of the execution algorithms described in subparagraphs
(A) \3\ or (B). The
[[Page 79540]]
Exchange will issue an Options Alert specifying which execution
algorithm will govern which options any time a change is made.
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\3\ NASDAQ is also proposing to amend subparagraph (A) to
provide that, respecting the price/time execution algorithm, within
each price level, if there are two or more quotes or orders at the
best price, trading interest will be executed in time priority. This
is intended to be clearer and match the new language in subparagraph
(B).
---------------------------------------------------------------------------
Further, NASDAQ proposes to adopt new subparagraph (B) to provide
that when the Size Pro-Rata execution algorithm is in effect the System
shall execute trading interest in price priority, meaning it will
execute all trading interest at the best price level within the System
before executing trading interest at the next best price. Within each
price level, if there are two or more quotes or orders at the best
price, trading interest will be executed based on the size of each
Participant's quote or order as a percentage of the total size of all
orders and quotes resting at that price. If this is not a whole number,
it will be rounded down to the nearest whole number. If there are
residual contracts remaining after rounding, such contracts will be
distributed one contract at a time to the remaining Participants in
time priority.\4\ The Size Pro-Rata execution algorithm will,
initially, always operate with the priority overlays, as described
further below.
---------------------------------------------------------------------------
\4\ This is substantially similar to BX Options, Chapter VI,
Section 10(1)(B).
Example 1--rounding approach Order 1: Buy 10 contracts for 1.84,
Non-Market Maker broker-dealer
Order 2: Buy 10 contracts for 1.84, Public Customer
Quote: 1.84 (70) x 1.86 (10) MM1
Order 3: Buy 10 contracts for 1.84, Market Maker
Market: 1.84 (100 contracts total) x 1.86 (10 contracts)
Sell order received: Sell 25 contracts at 1.84
Execution:
Order 1 represents 10 of 100 (10%) total contracts at 1.84.
10% of 25 contracts (which is the sell order) execute = 2.5, rounds
down to 2 contracts.
Order 2 represents 10 of 100 (10%) total contracts at 1.84.
10% of 25 contracts (which is the sell order) execute = 2.5, rounds
down to 2 contracts.
MM1's quote represents 70 of 100 (70%) total contracts at 1.84.
Again, 70% of 25 contracts execute = 17.5, rounds down to 17
contracts.
Order 3 represents 10 of 100 (10%) total contracts at 1.84.
10% of 25 contracts (which is the sell order) execute = 2.5, rounds
down to 2 contracts.
Total executed: 23. There are 2 residual contracts remaining from
the 25 contract sell order.
The remaining 2 contracts are allocated one at a time based on time
as follows:
Order 1 receives 1 additional residual contract.
Order 2 receives 1 additional residual contract.
The 25 contract sell order is now completely executed.
In addition, NASDAQ proposes to adopt two priority overlays. The
new subparagraph (C), Priority Overlays Applicable to Size Pro-Rata
Execution Algorithm, will provide that the Exchange may apply these
priority overlays. NASDAQ plans to implement the Size Pro-Rata
execution algorithm with both the Public Customer and Market Maker
priority overlays.
The first priority overlay, Public Customer Priority, is proposed
to be subparagraph (1)(C)(i). Under this priority overlay, interest at
the highest bid and lowest offer shall have priority except that Public
Customer orders shall have priority over non-Public Customer orders at
the same price. If there are two or more Public Customer orders for the
same options series at the same price, priority shall be afforded to
such Public Customer orders in the sequence in which they are received
by the System. For purposes of this Rule, a Public Customer order does
not include a Professional Order. This is substantially similar to BX
Options, Chapter VI, Section 10.
The second proposed priority overlay is contained in subparagraph
(1)(C)(ii), Market Maker Priority. Under this priority overlay, the
highest bid and lowest offer shall have priority except that Options
Market Maker orders, after all Public Customer orders have been fully
executed in time priority, shall have priority over all other
Participant orders at the same price. The Public Customer priority is
always a part of the Market Maker Priority overlay and both overlays
will always apply to the Size Pro-Rata execution algorithm initially.
If there are two or more Options Market Maker quotes and orders for the
same options series at the same price, those orders shall be executed
based on the Size Pro-Rata execution algorithm. If there are contracts
remaining after all Market Maker interest has been fully executed
(meaning, Non-Public Customer and Non-Market Maker), such contracts
shall be executed based on the Size Pro-Rata execution algorithm.\5\
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\5\ This is substantially similar to BX Options, Chapter VI,
Section 10(1)(C).
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The following is an example of the Public Customer and Market Maker
priority overlays applied to the proposed Size Pro-Rata execution
algorithm:
Example 2:
Order 1: Buy 10 contracts for 1.84, Non-MM broker-dealer
Order 2: Buy 10 contracts for 1.84, Public Customer
Quote MM1: 1.84 (10) x 1.86 (10)
Order 3: Buy MM 1.84 (10)
Sell order received: Sell 21 contracts at 1.84
Execution:
Order 2 allocated 10 contracts because of Public Customer priority
Quote MM1 represents 10 of 20 (50%) total MM contracts at 1.84. 50%
of 11 contracts to execute = 5.5, rounds down to 5 contracts.
Order 3 represents 10 of 20 (50%) total MM contracts at 1.84. 50% of
11 contracts to execute = 5.5, rounds down to 5 contracts.
Remaining 1 contract is allocated to MM1 based on time among MMs.
Order 1 is not executed because Market Makers have priority over
non-Market Maker broker-dealers. Order 1 would only be executed if
all interest at the Public Customer priority level and the Market
Maker level was first completely executed.
In summary, this proposed rule change will allow for a different
execution algorithm for NOM. To be clear, two different execution
algorithms will not operate in the same option. In addition, when the
Size Pro-Rata execution algorithm is selected by NASDAQ, the proposed
new priority overlays will be applied first as part of the execution
algorithm used to allocate the order. These additional priority
overlays are Public Customer priority and Market Maker priority, which
will only apply to the Size Pro-Rata execution algorithm. NASDAQ notes
that the execution algorithm will be selected and communicated by
NASDAQ to NOM Participants. The Public Customer and Market Maker
priority overlays will always operate with the Size Pro-Rata execution
algorithm.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \6\ in general, and furthers the objectives of Section
6(b)(5) of the Act \7\ in particular, in that it is designed to promote
just and equitable principles of trade and to protect investors and the
public interest, because it will provide an additional execution
algorithm with priority overlays on NOM. This additional execution
algorithm with priority overlays should provide Participants with
additional choices among the many competing exchanges with regard to
their execution needs and strategies, which should promote just and
equitable principles of trade. The Exchange believes that adding this
flexibility to its rules will allow for greater customization,
resulting in enhanced service to its customers and users, which would
continue to be a purely objective method for allocating option trades.
The Exchange is seeking to create additional incentives for firms
[[Page 79541]]
to provide liquidity on NOM. The Exchange believes that, while the
price/time execution algorithm encourages liquidity providers to set
the price, the Size Pro-Rata execution algorithm encourages liquidity
providers to add size to a bid/offer at a particular price, even if
that Participant did not set the price. Rewarding liquidity providers
who add size should encourage larger displayed markets, which should,
in turn, benefit and protect investors and the public interest. The
Exchange believes that the public customer priority overlay is designed
to promote just and equitable principles of trade and to protect
investors and the public interest, because it recognizes the unique
status of customers in the marketplace and the role their orders play
in price competition and adding depth to the marketplace. The Exchange
believes that the market maker priority overlay is designed to promote
just and equitable principles of trade and to protect investors and the
public interest, because it strikes a reasonable balance between
encouraging vigorous price competition and rewarding market makers for
their unique obligations.\8\ Overall, the overlays represent a careful
balancing by the Exchange of the rewards and obligations of various
types of market participants.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ See NOM Rules, Chapter VII, Sections 5 and 6.
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With respect to the proposed language in subparagraph (A)
respecting the price/time execution algorithm, the Exchange believes
that the clarification (that within each price level, if there are two
or more quotes or orders at the best price, trading interest will be
executed in time priority) is designed to promote just and equitable
principles of trade and to protect investors and the public interest by
making the rule clearer and structured in a way that is user-friendly.
(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. With respect to inter-market
competition, the proposal should enhance NOM's competitive position, as
NOM competes vigorously with many other options exchanges. With respect
to intra-market competition, the Exchange believes that the proposal
will encourage liquidity providers to compete based on the size of
their bids/offers. The Exchange does not believe that this will impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act, because the size pro-rata allocation
algorithms are prevalent on options exchanges, and liquidity providers
can also choose to operate on price/time exchanges instead.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \9\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(a)(ii).
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
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 (http://www.sec.gov/rules/sro.shtml) or
Send an email to rule-comments@sec.gov. Please include File Number
SR-NASDAQ-2013-156 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-NASDAQ-2013-156. 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 (http://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-NASDAQ-2013-156 and should
be submitted on or before January 21, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-31129 Filed 12-27-13; 8:45 am]
BILLING CODE 8011-01-P