Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt a Limit Order Protection and a Market Order Protection, 4684-4687 [2016-01538]

Download as PDF 4684 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices 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 such 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–BYX– 2016–01, and should be submitted on or before February 17, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Brent J. Fields, Secretary. [FR Doc. 2016–01664 Filed 1–26–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76956; File No. SR– NASDAQ–2016–005] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt a Limit Order Protection and a Market Order Protection January 21, 2016. asabaliauskas on DSK5VPTVN1PROD with NOTICES 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 January 12, 2016, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Nasdaq’s Rule 4757, entitled ‘‘Book 22 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 Processing’’ to adopt a Limit Order Protection or ‘‘LOP’’ and a Market Order Protection for members accessing the Nasdaq Market Center. The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt two new mechanisms to protect against erroneous orders which are entered into the Nasdaq Market Center. Specifically, these features address risks to market participants of human error in entering Orders at unintended prices. LOP and the Market Order Protection would prevent certain Orders from executing or being placed on the Order Book at prices outside pre-set standard limits. The System would not accept such Orders, rather than executing them automatically. The proposed LOP and Market Order Protection features are similar to risk features which exist today on the NASDAQ Options Market LLC (‘‘NOM’’) 3 and are available for Options Participants. Background Today, the National Market System Plan to Address Extraordinary Market Volatility (the ‘‘Plan’’) 4 provides a limit up-limit down (‘‘LULD’’) mechanism designed to prevent trades in NMS securities from occurring outside of specified price bands. The bands are set 3 See NOM Rules at Chapter VI, Section 6(c) and Section 18. 4 See Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4–631) (Order Approving, on a Pilot Basis, the National Market System Plan To Address Extraordinary Market Volatility). See also Rule 608 of Regulation NMS under the Act. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 at a percentage level above and below the average transaction price of the security over the immediately preceding five-minute period, and are calculated on a continuous basis during regular trading hours.5 Rule 4120, entitled ‘‘Limit Up-Limit Down Plan and Trading Halts,’’ describes this process for the Nasdaq Market Center. The Exchange proposes to adopt two new features, LOP for Limit Orders and Market Order Protection for Market Orders, which would cancel these Orders back to the member when the order exceeds certain defined logic. These two new features would be in addition to the LULD protections, which exist today.6 Each mechanism is explained further below. LOP The Exchange proposes to adopt a new LOP feature on the Nasdaq Market Center to prevent certain Limit Orders at prices outside of pre-set standard limits (‘‘LOP Limit Table’’) from being accepted by the System. LOP shall apply to all Quotes and Orders,7 including any modified Orders.8 LOP would not apply to Market Orders. LOP would be operational each trading day, except during opening and closing crosses, initial public offerings and trading halts.9 Since Nasdaq Rules provided controls for the opening, closing and initial public offering processes within the Rulebook, the proposed protections are rendered ineffective for those processes.10 5 If the National Best Offer (‘‘NBO’’) equals the lower price band without crossing the NBBO, or National Best Bid (‘‘NBB’’) equals the upper price band without crossing the NBBO, then the stock will enter a limit state quotation period of 15 seconds during which no new reference prices or price bands will be calculated. A stock will exit the limit state when the entire size of all quotations are executed or cancelled. If the limit state exists and trading continues to occur at the price band, or no trading occurs within the price band, for more than 15 seconds, then a five minute trading pause will be enacted. 6 While LULD bands are in place from 9:30 to 4:00 p.m. E.T. each trading day, these new protections will be in place for each trading session. 7 An Intermarket Sweep or ISO Order, which is an Order that is immediately executable within the Nasdaq Market Center against Orders against which they are marketable, is subject to LOP. See NASDAQ Rule 4702. 8 If an Order is modified, LOP will review the order anew and, if LOP is triggered, such modification will not take effect and the original order will not be accepted. 9 LOP has the ability to suspend by symbol or system wide. The Exchange would notify market participants of any suspension that may be in place via an alert. 10 The Nasdaq Rulebook provides specific rules for certain auction mechanisms, such as the opening, closing and initial public offering process. The mechanisms contain their own protections with respect to the entry of Orders within those mechanisms. The addition of the proposed E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices Members will be subject to certain parameters when submitting Orders into the Order Book. The Exchange proposes to not accept incoming Limit Orders that exceed the LOP Reference Threshold. The LOP Limit Table contains upper limits and lower limits, for a particular security, across all trading sessions. For example, today, if the NBO is at $50 and a Limit Buy Order was entered into the System at $500, the Limit Buy Order would execute at $50 and then would continue to be executed at other applicable price levels within the Order Book until the Limit Buy Order was canceled or halted. The Exchange proposes LOP to avoid a series of improperly priced aggressive orders transacting in the Order Book. With respect to Market Maker Peg Orders,11 the applicable limits shall be two times greater than the limits stated in the LOP Limit Table. A Market Maker Peg Order is a passive Order type which will not otherwise remove liquidity from the Order Book. This Order type was designed to assist Market Makers with meeting their quoting obligations which may require quoting at levels that are not standardized with LULD guidelines. Market Makers have a diverse business model as compared with other market participants. Widening the applicable limits for these market participants serves to promote market making. The Exchange believes that because Market Makers have other risk protections in place to prevent them from quoting outside of their financial means, the risk level for erroneous trades is not the same as with other market participants. Market Makers Securities Market Hours, excluding Open/Close (9:45 a.m. to 3:35 p.m.). Market Hours, excluding Open/Close (9:45 a.m. to 3:35 p.m.). Market Hours, excluding Open/Close (9:45 a.m. to 3:35 p.m.). During Market Open/Close 4:00 a.m. and 9:45 a.m. 3:35 p.m. and 8:00 p.m. During Market Open/Close 4:00 a.m. and 9:45 a.m. 3:35 p.m. and 8:00 p.m. Same as above. During Market Open/Close 4:00 a.m. and 9:45 a.m. 3:35 p.m. and 8:00 p.m. have more sophisticated infrastructures than other market participants and are able to manage their risk, particularly with quoting, utilizing other tools which may not be available to other market participants. The Exchange will send an Equity Trader Alert in advance of implementation with the initial LOP Limit Table and, thereafter, to modify the LOP Limit Table. The initial LOP Limit Table utilizes the same limits as LULD to compare against the LOP Reference Threshold. The Exchange believes that utilizing the same tiers and bands will seek to provide additional market protection to Nasdaq members that submit erroneous trades, prior to reaching LULD limits. The initial LOP table is below. Time period Tier 1 and Tier 2 NMS Securities Reference Price > $3.00. Tier 1 and Tier 2 NMS Securities Reference Price equal to $0.75 to and including $3.00. Tier 1 & 2 NMS Securities Reference Price Less than $0.75. Tier 1 and Tier 2 NMS Securities Reference Price > $3.00. Tier 1 and Tier 2 NMS Securities Reference Price equal to $0.75 to and including $3.00. Tier 1 and Tier 2 NMS Securities Reference Price less than $0.75. 4685 Price band percentage 5% (Tier 1) & 10% (Tier 2). 20%. The lesser of $0.15 or 75%. 10% & 20% Note: Band % is doubled during these times. 40% Note: Band % is doubled during these times. Lesser of $0.30 or 150% (upper band only) Note: Band % is doubled during these times. asabaliauskas on DSK5VPTVN1PROD with NOTICES LOP will cause Limit Orders to not be accepted if the price of the Limit Order is greater than the LOP Reference Threshold for a buy Limit Order. Limit Orders will also not be accepted if the price of the Limit Order is less than the LOP Reference Threshold for a sell Limit Order. The Exchange believes that doubling the band percentage for pre-open and post-close sessions is reasonable due to the volatility which may occur in the market during those trading sessions. The LULD Plan also doubles the percentages for pre-open and post-close thereby aligning this protection with the LULD Plan.12 The LOP Reference Price shall be the current consolidated national Best Bid or Best Offer (consolidated NBBO), the Bid for sell orders and the Offer for buy orders. If there is no consolidated NBBO for a security, or if there is a one-sided market, the last regular way consolidated sale, adjusted for corporate actions, if any, will be the LOP Reference Price. If there is no last regular way consolidated sale on that trade date, then the prior day’s adjusted close will be the LOP Reference Price. Market Order Protection With respect to Market Orders, these Orders will not be accepted if the security is in an LULD Straddle State.13 If the offer is in a Straddle State then all buy Market Orders will not be accepted. If the bid is in a Straddle State than all protections does not add value in the Exchange’s analysis of those structures. 11 A ‘‘Market Maker Peg Order’’ is an Order Type designed to allow a Market Maker to maintain a continuous two-sided quotation at a displayed price that is compliant with the quotation requirements for Market Makers set forth in Rule 4613(a)(2). The displayed price of the Market Maker Peg Order is set with reference to a ‘‘Reference Price’’ in order to keep the displayed price of the Market Maker Peg Order within a bounded price range. A Market Maker Peg Order may be entered through RASH, FIX or QIX only. A Market Maker Peg Order must be entered with a limit price beyond which the Order may not be priced. The Reference Price for a Market Maker Peg Order to buy (sell) is the then- current National Best Bid (National Best Offer) (including Nasdaq), or if no such National Best Bid or National Best Offer, the most recent reported lastsale eligible trade from the responsible single plan processor for that day, or if none, the previous closing price of the security as adjusted to reflect any corporate actions (e.g., dividends or stock splits) in the security. See Nasdaq Rule 4702(b)(7). 12 The LULD Plan provides that between 9:30 a.m. and 9:45 a.m. ET, and 3:35 p.m. and 4:00 p.m. ET, or in the case of an early scheduled close, during the last 25 minutes of trading before the early scheduled close, the Price Bands shall be calculated by applying double the Percentage Parameters set forth in Appendix A. See Rule 608 of Regulation NMS under the Act. 13 The LULD Plan defines a Straddle State as when the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS Stock is not in a Limit State. For example, assume the Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS stock would be in a Straddle State if the National Best Bid were below $9.50, and therefore nonexecutable, and the National Best Offer were above $9.50 (including a National Best Offer that could be above $10.50). If an NMS Stock is in a Straddle State and trading in that stock deviates from normal trading characteristics, the Primary Listing Exchange may declare a Trading Pause for that NMS Stock. See Section VII(A)(2) of the Plan. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 The LOP Reference Threshold for buy orders will be the LOP Reference Price (offer) plus the applicable percentage specified in the LOP Limit Table. The LOP Reference Threshold for sell orders will be the LOP Reference Price (bid) minus the applicable percentage specified in the LOP Limit Table. E:\FR\FM\27JAN1.SGM 27JAN1 4686 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES sell market orders will not be accepted. The Exchange believes that this Market Order Protection feature will prevent Participants from executing Market Orders that stray widely from the LULD defined reference price. The Exchange also notes that both LOP and Market Order Protection will be applicable to all protocols.14 Both the LOP and Market Order Protection features will be mandatory for all Nasdaq members. The Exchange proposes to implement this rule within ninety (90) days of the implementation date. The Exchange will issue an Equities Trader Alert in advance to inform market participants of such implementation date. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 15 in general, and furthers the objectives of Section 6(b)(5) of the Act 16 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest, by mitigating risks to market participants of human error in entering Orders at clearly unintended prices. Also, the Market Order Protection feature would protect Market Orders from being executed in very wide markets when those prices are compared to the reference price. The Exchange believes that the proposals are appropriate and reasonable, because they offer protections to both Limit and Market Orders which should encourage price continuity and, in turn, protect investors and the public interest by reducing executions occurring at dislocated prices. The Exchange believes that the proposed LOP and Market Order Protection features would assist with the maintenance of fair and orderly markets by mitigating the risks associated with errors resulting in executions at prices that are away from the Best Bid or Offer and potentially erroneous. Further the proposal protects investors from potentially receiving executions away from the prevailing prices at any given time. The Exchange believes that the LOP Limit Table is appropriate because it is based on the current LULD bands. The Exchange believes that the proposed 14 Nasdaq maintains several communications protocols for Participants to use in entering Orders and sending other messages to the Nasdaq Market Center, such as: OUCH, RASH, QIX, FLITE and FIX. 15 15 U.S.C. 78f(b). 16 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 specified percentages are appropriate because LOP and is designed to reduce the risk of, and to potentially prevent, the automatic execution of Orders at prices that may be considered clearly erroneous. The System will only execute Limit Orders priced within the LOP Limit Table or within the upper (lower) band of LULD, if the latter is more conservative. The Exchange believes that the proposal to not accept System Orders in a Straddle State will prevent Market Orders from being entered by market participants at erroneous prices which the Exchange believes would stray widely from the LULD defined reference price. The Exchange believes LOP and Market Order Protection will remove impediments to and perfect the mechanisms of a free and open market because these features will operate in tandem with LULD. 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. The Exchange believes the LOP and Market Order Protection features will provide market participants with additional protection from anomalous executions, in addition to LULD protections. Thus, the Exchange does not believe the proposal creates any significant impact on competition. These types of risk protections are in place today for NOM Participants.17 The Exchange believes that offering these protections to the Nasdaq Market Center will not impose any undue burden on intra-market competition, rather, it would permit equities and options members to be protected in a similar manner from erroneous executions. 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 Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its 17 See NOM Rules at Chapter VI, Section 6(c) and Section 18. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2016–005 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2016–005. 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– NASDAQ–2016–005 and should be E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices submitted on or before February 17, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Brent J. Fields, Secretary. [FR Doc. 2016–01538 Filed 1–26–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76950; File No. SR– NASDAQ–2016–003] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Options Regulatory Fee January 21, 2016. 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 January 8, 2016, 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. asabaliauskas on DSK5VPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Chapter XV, entitled ‘‘Options Pricing,’’ at Section 5, entitled ‘‘NASDAQ Options Regulatory Fee,’’ which governs pricing for Exchange Participants using the NASDAQ Options Market (‘‘NOM’’), the Exchange’s facility for executing and routing standardized equity and index options. The Exchange proposes to increase the current Options Regulatory Fee. While changes to the Pricing Schedule pursuant to this proposal are effective upon filing, the Exchange has designated these changes to be operative on February 1, 2016. The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 18 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to (1) increase the ORF from $0.0015 to $0.0019 as of February 1, 2016 to balance the Exchange’s regulatory revenue against the anticipated costs; and (2) remove the requirement that the ORF may only be modified semi-annually. Background The ORF is assessed to each Participant for all options transactions executed or cleared by the Participant that are cleared at The Options Clearing Corporation (‘‘OCC’’) in the Customer range (i.e., that clear in the Customer account of the Participant’s clearing firm at OCC). The Exchange monitors the amount of revenue collected from the ORF to ensure that it, in combination with other regulatory fees and fines, does not exceed regulatory costs. The ORF is imposed upon all transactions executed by a Participant, even if such transactions do not take place on the Exchange.3 The ORF also includes options transactions that are not executed by a Participant but are ultimately cleared by a Participant.4 The ORF is not charged for Participant proprietary options transactions because Participants incur the costs of owning memberships and through their membership are charged transaction fees, dues and other fees that are not 3 The ORF applies to all ‘‘C’’ account origin code orders executed by a Participant on the Exchange. 4 In the case where one Participant both executes a transaction and clears the transaction, the ORF is assessed to the Participant only once on the execution. In the case where one Participant executes a transaction and a different Participant clears the transaction, the ORF is assessed only to the Participant who executes the transaction and is not assessed to the Participant who clears the transaction. In the case where a non-member executes a transaction and a Participant clears the transaction, the ORF is assessed to the Participant who clears the transaction. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 4687 applicable to non-members. The dues and fees paid by Participants go into the general funds of the Exchange, a portion of which is used to help pay the costs of regulation. The ORF is collected indirectly from Participants through their clearing firms by OCC on behalf of the Exchange. The ORF is designed to recover a portion of the costs to the Exchange of the supervision and regulation of its Participants, including performing routine surveillances, investigations, examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities. The Exchange believes that revenue generated from the ORF, when combined with all of the Exchange’s other regulatory fees, will cover a material portion, but not all, of the Exchange’s regulatory costs. The Exchange will continue to monitor the amount of revenue collected from the ORF to ensure that it, in combination with its other regulatory fees and fines, does not exceed regulatory costs. If the Exchange determines regulatory revenues exceed regulatory costs, the Exchange will adjust the ORF by submitting a fee change filing to the Commission. ORF Adjustments The Exchange proposes to increase the ORF from $0.0015 to $0.0019 as of February 1, 2016 in order to balance the Exchange’s regulatory revenue against the anticipated costs. The Exchange regularly reviews its ORF to ensure that the ORF, in combination with its other regulatory fees and fines, does not exceed regulatory costs. The Exchange believes this adjustment will permit the Exchange to cover a material portion of its regulatory costs, while not exceeding regulatory costs. Semi-Annual Changes to ORF Currently, the ORF specifies the Exchange may only increase or decrease the ORF semi-annually, and any such fee change will be effective on the first business day of February or August.5 The Exchange is proposing to eliminate this requirement because the Exchange believes it requires the flexibility to amend its ORF to meet its regulatory requirements and adjust its ORF to account for the regulatory revenue that it receives and the costs that it incurs, as needed. While the Exchange is eliminating the requirement to adjust only semi-annually, it will continue to submit a rule proposal with the Commission for each modification to the ORF and notify participants via an Options Trader Alert of any anticipated 5 See E:\FR\FM\27JAN1.SGM NOM Rules at Chapter XV, Section 5. 27JAN1

Agencies

[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4684-4687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76956; File No. SR-NASDAQ-2016-005]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a Limit Order 
Protection and a Market Order Protection

January 21, 2016.
    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 January 12, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I 
and II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq's Rule 4757, entitled ``Book 
Processing'' to adopt a Limit Order Protection or ``LOP'' and a Market 
Order Protection for members accessing the Nasdaq Market Center.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt two new mechanisms to protect 
against erroneous orders which are entered into the Nasdaq Market 
Center. Specifically, these features address risks to market 
participants of human error in entering Orders at unintended prices. 
LOP and the Market Order Protection would prevent certain Orders from 
executing or being placed on the Order Book at prices outside pre-set 
standard limits. The System would not accept such Orders, rather than 
executing them automatically. The proposed LOP and Market Order 
Protection features are similar to risk features which exist today on 
the NASDAQ Options Market LLC (``NOM'') \3\ and are available for 
Options Participants.
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    \3\ See NOM Rules at Chapter VI, Section 6(c) and Section 18.
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Background
    Today, the National Market System Plan to Address Extraordinary 
Market Volatility (the ``Plan'') \4\ provides a limit up-limit down 
(``LULD'') mechanism designed to prevent trades in NMS securities from 
occurring outside of specified price bands. The bands are set at a 
percentage level above and below the average transaction price of the 
security over the immediately preceding five-minute period, and are 
calculated on a continuous basis during regular trading hours.\5\ Rule 
4120, entitled ``Limit Up-Limit Down Plan and Trading Halts,'' 
describes this process for the Nasdaq Market Center.
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    \4\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving, 
on a Pilot Basis, the National Market System Plan To Address 
Extraordinary Market Volatility). See also Rule 608 of Regulation 
NMS under the Act.
    \5\ If the National Best Offer (``NBO'') equals the lower price 
band without crossing the NBBO, or National Best Bid (``NBB'') 
equals the upper price band without crossing the NBBO, then the 
stock will enter a limit state quotation period of 15 seconds during 
which no new reference prices or price bands will be calculated. A 
stock will exit the limit state when the entire size of all 
quotations are executed or cancelled. If the limit state exists and 
trading continues to occur at the price band, or no trading occurs 
within the price band, for more than 15 seconds, then a five minute 
trading pause will be enacted.
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    The Exchange proposes to adopt two new features, LOP for Limit 
Orders and Market Order Protection for Market Orders, which would 
cancel these Orders back to the member when the order exceeds certain 
defined logic. These two new features would be in addition to the LULD 
protections, which exist today.\6\ Each mechanism is explained further 
below.
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    \6\ While LULD bands are in place from 9:30 to 4:00 p.m. E.T. 
each trading day, these new protections will be in place for each 
trading session.
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LOP
    The Exchange proposes to adopt a new LOP feature on the Nasdaq 
Market Center to prevent certain Limit Orders at prices outside of pre-
set standard limits (``LOP Limit Table'') from being accepted by the 
System. LOP shall apply to all Quotes and Orders,\7\ including any 
modified Orders.\8\ LOP would not apply to Market Orders. LOP would be 
operational each trading day, except during opening and closing 
crosses, initial public offerings and trading halts.\9\ Since Nasdaq 
Rules provided controls for the opening, closing and initial public 
offering processes within the Rulebook, the proposed protections are 
rendered ineffective for those processes.\10\

[[Page 4685]]

Members will be subject to certain parameters when submitting Orders 
into the Order Book.
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    \7\ An Intermarket Sweep or ISO Order, which is an Order that is 
immediately executable within the Nasdaq Market Center against 
Orders against which they are marketable, is subject to LOP. See 
NASDAQ Rule 4702.
    \8\ If an Order is modified, LOP will review the order anew and, 
if LOP is triggered, such modification will not take effect and the 
original order will not be accepted.
    \9\ LOP has the ability to suspend by symbol or system wide. The 
Exchange would notify market participants of any suspension that may 
be in place via an alert.
    \10\ The Nasdaq Rulebook provides specific rules for certain 
auction mechanisms, such as the opening, closing and initial public 
offering process. The mechanisms contain their own protections with 
respect to the entry of Orders within those mechanisms. The addition 
of the proposed protections does not add value in the Exchange's 
analysis of those structures.
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    The Exchange proposes to not accept incoming Limit Orders that 
exceed the LOP Reference Threshold. The LOP Limit Table contains upper 
limits and lower limits, for a particular security, across all trading 
sessions. For example, today, if the NBO is at $50 and a Limit Buy 
Order was entered into the System at $500, the Limit Buy Order would 
execute at $50 and then would continue to be executed at other 
applicable price levels within the Order Book until the Limit Buy Order 
was canceled or halted. The Exchange proposes LOP to avoid a series of 
improperly priced aggressive orders transacting in the Order Book.
    With respect to Market Maker Peg Orders,\11\ the applicable limits 
shall be two times greater than the limits stated in the LOP Limit 
Table. A Market Maker Peg Order is a passive Order type which will not 
otherwise remove liquidity from the Order Book. This Order type was 
designed to assist Market Makers with meeting their quoting obligations 
which may require quoting at levels that are not standardized with LULD 
guidelines. Market Makers have a diverse business model as compared 
with other market participants. Widening the applicable limits for 
these market participants serves to promote market making. The Exchange 
believes that because Market Makers have other risk protections in 
place to prevent them from quoting outside of their financial means, 
the risk level for erroneous trades is not the same as with other 
market participants. Market Makers have more sophisticated 
infrastructures than other market participants and are able to manage 
their risk, particularly with quoting, utilizing other tools which may 
not be available to other market participants.
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    \11\ A ``Market Maker Peg Order'' is an Order Type designed to 
allow a Market Maker to maintain a continuous two-sided quotation at 
a displayed price that is compliant with the quotation requirements 
for Market Makers set forth in Rule 4613(a)(2). The displayed price 
of the Market Maker Peg Order is set with reference to a ``Reference 
Price'' in order to keep the displayed price of the Market Maker Peg 
Order within a bounded price range. A Market Maker Peg Order may be 
entered through RASH, FIX or QIX only. A Market Maker Peg Order must 
be entered with a limit price beyond which the Order may not be 
priced. The Reference Price for a Market Maker Peg Order to buy 
(sell) is the then-current National Best Bid (National Best Offer) 
(including Nasdaq), or if no such National Best Bid or National Best 
Offer, the most recent reported last-sale eligible trade from the 
responsible single plan processor for that day, or if none, the 
previous closing price of the security as adjusted to reflect any 
corporate actions (e.g., dividends or stock splits) in the security. 
See Nasdaq Rule 4702(b)(7).
---------------------------------------------------------------------------

    The Exchange will send an Equity Trader Alert in advance of 
implementation with the initial LOP Limit Table and, thereafter, to 
modify the LOP Limit Table. The initial LOP Limit Table utilizes the 
same limits as LULD to compare against the LOP Reference Threshold. The 
Exchange believes that utilizing the same tiers and bands will seek to 
provide additional market protection to Nasdaq members that submit 
erroneous trades, prior to reaching LULD limits. The initial LOP table 
is below.

------------------------------------------------------------------------
                                                         Price band
         Securities                Time period           percentage
------------------------------------------------------------------------
Tier 1 and Tier 2 NMS         Market Hours,         5% (Tier 1) & 10%
 Securities Reference Price    excluding Open/       (Tier 2).
 > $3.00.                      Close (9:45 a.m. to
                               3:35 p.m.).
Tier 1 and Tier 2 NMS         Market Hours,         20%.
 Securities Reference Price    excluding Open/
 equal to $0.75 to and         Close (9:45 a.m. to
 including $3.00.              3:35 p.m.).
Tier 1 & 2 NMS Securities     Market Hours,         The lesser of $0.15
 Reference Price Less than     excluding Open/       or 75%.
 $0.75.                        Close (9:45 a.m. to
                               3:35 p.m.).
Tier 1 and Tier 2 NMS         During Market Open/   10% & 20% Note: Band
 Securities Reference Price    Close 4:00 a.m. and   % is doubled during
 > $3.00.                      9:45 a.m. 3:35 p.m.   these times.
                               and 8:00 p.m.
Tier 1 and Tier 2 NMS         During Market Open/   40% Note: Band % is
 Securities Reference Price    Close 4:00 a.m. and   doubled during
 equal to $0.75 to and         9:45 a.m. 3:35 p.m.   these times.
 including $3.00.              and 8:00 p.m. Same
                               as above.
Tier 1 and Tier 2 NMS         During Market Open/   Lesser of $0.30 or
 Securities Reference Price    Close 4:00 a.m. and   150% (upper band
 less than $0.75.              9:45 a.m. 3:35 p.m.   only) Note: Band %
                               and 8:00 p.m.         is doubled during
                                                     these times.
------------------------------------------------------------------------

    LOP will cause Limit Orders to not be accepted if the price of the 
Limit Order is greater than the LOP Reference Threshold for a buy Limit 
Order. Limit Orders will also not be accepted if the price of the Limit 
Order is less than the LOP Reference Threshold for a sell Limit Order.
    The Exchange believes that doubling the band percentage for pre-
open and post-close sessions is reasonable due to the volatility which 
may occur in the market during those trading sessions. The LULD Plan 
also doubles the percentages for pre-open and post-close thereby 
aligning this protection with the LULD Plan.\12\
---------------------------------------------------------------------------

    \12\ The LULD Plan provides that between 9:30 a.m. and 9:45 a.m. 
ET, and 3:35 p.m. and 4:00 p.m. ET, or in the case of an early 
scheduled close, during the last 25 minutes of trading before the 
early scheduled close, the Price Bands shall be calculated by 
applying double the Percentage Parameters set forth in Appendix A. 
See Rule 608 of Regulation NMS under the Act.
---------------------------------------------------------------------------

    The LOP Reference Price shall be the current consolidated national 
Best Bid or Best Offer (consolidated NBBO), the Bid for sell orders and 
the Offer for buy orders. If there is no consolidated NBBO for a 
security, or if there is a one-sided market, the last regular way 
consolidated sale, adjusted for corporate actions, if any, will be the 
LOP Reference Price. If there is no last regular way consolidated sale 
on that trade date, then the prior day's adjusted close will be the LOP 
Reference Price.
    The LOP Reference Threshold for buy orders will be the LOP 
Reference Price (offer) plus the applicable percentage specified in the 
LOP Limit Table. The LOP Reference Threshold for sell orders will be 
the LOP Reference Price (bid) minus the applicable percentage specified 
in the LOP Limit Table.
Market Order Protection
    With respect to Market Orders, these Orders will not be accepted if 
the security is in an LULD Straddle State.\13\ If the offer is in a 
Straddle State then all buy Market Orders will not be accepted. If the 
bid is in a Straddle State than all

[[Page 4686]]

sell market orders will not be accepted. The Exchange believes that 
this Market Order Protection feature will prevent Participants from 
executing Market Orders that stray widely from the LULD defined 
reference price.
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    \13\ The LULD Plan defines a Straddle State as when the National 
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and 
the NMS Stock is not in a Limit State. For example, assume the Lower 
Price Band for an NMS Stock is $9.50 and the Upper Price Band is 
$10.50, such NMS stock would be in a Straddle State if the National 
Best Bid were below $9.50, and therefore non-executable, and the 
National Best Offer were above $9.50 (including a National Best 
Offer that could be above $10.50). If an NMS Stock is in a Straddle 
State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a Trading 
Pause for that NMS Stock. See Section VII(A)(2) of the Plan.
---------------------------------------------------------------------------

    The Exchange also notes that both LOP and Market Order Protection 
will be applicable to all protocols.\14\ Both the LOP and Market Order 
Protection features will be mandatory for all Nasdaq members. The 
Exchange proposes to implement this rule within ninety (90) days of the 
implementation date. The Exchange will issue an Equities Trader Alert 
in advance to inform market participants of such implementation date.
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    \14\ Nasdaq maintains several communications protocols for 
Participants to use in entering Orders and sending other messages to 
the Nasdaq Market Center, such as: OUCH, RASH, QIX, FLITE and FIX.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by mitigating risks to market participants of human error in 
entering Orders at clearly unintended prices. Also, the Market Order 
Protection feature would protect Market Orders from being executed in 
very wide markets when those prices are compared to the reference 
price. The Exchange believes that the proposals are appropriate and 
reasonable, because they offer protections to both Limit and Market 
Orders which should encourage price continuity and, in turn, protect 
investors and the public interest by reducing executions occurring at 
dislocated prices.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed LOP and Market Order 
Protection features would assist with the maintenance of fair and 
orderly markets by mitigating the risks associated with errors 
resulting in executions at prices that are away from the Best Bid or 
Offer and potentially erroneous. Further the proposal protects 
investors from potentially receiving executions away from the 
prevailing prices at any given time.
    The Exchange believes that the LOP Limit Table is appropriate 
because it is based on the current LULD bands. The Exchange believes 
that the proposed specified percentages are appropriate because LOP and 
is designed to reduce the risk of, and to potentially prevent, the 
automatic execution of Orders at prices that may be considered clearly 
erroneous. The System will only execute Limit Orders priced within the 
LOP Limit Table or within the upper (lower) band of LULD, if the latter 
is more conservative.
    The Exchange believes that the proposal to not accept System Orders 
in a Straddle State will prevent Market Orders from being entered by 
market participants at erroneous prices which the Exchange believes 
would stray widely from the LULD defined reference price.
    The Exchange believes LOP and Market Order Protection will remove 
impediments to and perfect the mechanisms of a free and open market 
because these features will operate in tandem with LULD.

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. The Exchange believes the LOP 
and Market Order Protection features will provide market participants 
with additional protection from anomalous executions, in addition to 
LULD protections. Thus, the Exchange does not believe the proposal 
creates any significant impact on competition. These types of risk 
protections are in place today for NOM Participants.\17\ The Exchange 
believes that offering these protections to the Nasdaq Market Center 
will not impose any undue burden on intra-market competition, rather, 
it would permit equities and options members to be protected in a 
similar manner from erroneous executions.
---------------------------------------------------------------------------

    \17\ See NOM Rules at Chapter VI, Section 6(c) and Section 18.
---------------------------------------------------------------------------

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2016-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-005. 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-NASDAQ-2016-005 and should 
be

[[Page 4687]]

submitted on or before February 17, 2016.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Brent J. Fields,
Secretary.
[FR Doc. 2016-01538 Filed 1-26-16; 8:45 am]
BILLING CODE 8011-01-P
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