Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Adopt a New Limit Up-Limit Down Pricing Program Under Rule 7014, 30381-30386 [2016-11411]
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Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
driven test that was designed to evaluate
the impact of a wider tick size on
trading, liquidity, and the market
quality of securities of smaller
capitalization companies, and was
therefore in furtherance of the purposes
of the Act. To the extent that this
proposal implements, interprets, and
clarifies the Plan and applies specific
requirements to Members, the Exchange
believes that this proposal is in
furtherance of the objectives of the Plan,
as identified by the SEC, and is
therefore consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change implements the provisions of the
Plan, and is designed to assist the
Exchange in meeting its regulatory
obligations pursuant to the Plan. The
Exchange also notes that the quoting
and trading requirements of the Plan
will apply equally to all Members that
trade Pilot Securities.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (A) Significantly affect
the protection of investors or the public
interest; (B) impose any significant
burden on competition; and (C) by its
terms, 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) of the
Act 47 and paragraph (f)(6) of Rule 19b–
4 thereunder,48 the Exchange has
designated this rule filing as noncontroversial. The Exchange has given
the Commission written notice of its
intent to file the proposed rule change,
along with a brief description and text
of 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.
At any time within 60 days of the
filing of the proposed rule change, the
47 15
U.S.C. 78s(b)(3)(A).
48 17 CFR 240.19b–4.
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Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (1) Necessary or appropriate in
the public interest; (2) for the protection
of investors; or (3) 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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–BatsEDGX–2016–14 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-BatsEDGX–2016–14. 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
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30381
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
BatsEDGX–2016–14, and should be
submitted on or before June 6, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–11402 Filed 5–13–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77800; File No. SR–
NASDAQ–2016–065]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change to Adopt a New
Limit Up-Limit Down Pricing Program
Under Rule 7014
May 10, 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 May 3,
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes a proposal to
adopt a new Limit Up-Limit Down
Pricing Program under Rule 7014 to
improve liquidity during Limit UpLimit Down events through incentive
rebates.
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
49 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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Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
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 is proposing to adopt a
new Limit Up-Limit Down Pricing
Program under Rule 7014 to improve
liquidity during Limit Up-Limit Down
events pursuant to Rule 4120(a)(12)
through incentive rebates.
Background
On May 6, 2010, the U.S. markets
experienced excessive volatility in an
abbreviated time period, commonly
referred to as the ‘‘flash crash.’’ Many of
the almost 8,000 equity securities and
exchange-traded funds (‘‘ETFs’’) traded
that day experienced rapid price
declines and reversals within a short
period of time. Staff of the SEC and the
U.S. Commodity Futures Trading
Commission (‘‘CFTC’’) (collectively,
‘‘Staff’’) worked together to study the
events of the flash crash, issuing a
report of their findings (‘‘Report’’) to the
Joint CFTC–SEC Advisory Committee
on Emerging Regulatory Issues
(‘‘Committee’’).3 Staff observed, among
other things, that there was a ‘‘liquidity
crisis’’ with respect to individual stocks,
whereby market participants widened
quote spreads, reduced offered liquidity,
or withdrew from the markets
altogether.4 Staff stated that:
While the withdrawal of a single
participant may not significantly impact the
entire market, a liquidity crisis can develop
if many market participants withdraw at the
same time. This, in turn, can lead to the
breakdown of a fair and orderly pricediscovery process, and in the extreme case
trades can be executed at stub-quotes used by
market makers to fulfill their continuous twosided obligations.5
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The Committee, in turn, issued a
series of recommendations based on its
analysis of Staff’s findings.6
3 See
Report of the Staffs of the CFTC and SEC
to the Joint Advisory Committee on Emerging
Regulatory Issues, ‘‘Findings Regarding the Market
Events of May 6, 2010,’’ dated September 30, 2010,
available at https://www.sec.gov/news/studies/2010/
marketevents-report.pdf.
4 See Report at 5.
5 Report at 6.
6 See Summary Report of the Committee,
‘‘Recommendations Regarding Regulatory
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In response to the market structure
issues uncovered by the flash crash and
the recommendations of the Committee,
the exchanges and FINRA (collectively,
the ‘‘SROs’’) implemented market-wide
measures designed to restore investor
confidence by reducing the potential for
excessive market volatility. One such
measure was the adoption of a pilot
plan for stock-by-stock trading pauses
by SROs. On May 31, 2012, the SEC
approved the National Market System
Plan to Address Extraordinary Market
Volatility, commonly referred to as the
‘‘Limit Up-Limit Down Plan.’’ 7 The
Limit Up-Limit Down Plan created a
market-wide limit up-limit down
mechanism intended to address
extraordinary market volatility in ‘‘NMS
Stocks,’’ as defined in Rule 600(b)(47) of
Regulation NMS under the Act.8 The
Limit Up-Limit Down Plan is designed
to prevent trades in individual NMS
Stocks from occurring outside of
specified Price Bands,9 which are based
on a Reference Price 10 for each NMS
Stock that equals the arithmetic mean
price of Eligible Reported
Transactions 11 for the NMS Stock over
the immediately preceding five-minute
period (except for periods following
openings and re-openings). The Price
Bands are disseminated by the single
plan processor responsible for the
consolidation of information for an
NMS Stock (‘‘Processor’’) pursuant to
Rule 603(b) of Regulation NMS.
The Limit Up-Limit Down Plan
prevents trades in individual NMS
Stocks from occurring outside of the
Price Bands by applying Limit States,12
whereby trading is permitted to
continue within certain upper and
lower limits, and Trading Pauses 13 to
accommodate more fundamental price
moves in an NMS Stock. An NMS Stock
will enter a Limit State if it has a
National Best Offer (‘‘NBO’’) that equals
the lower price band and does not cross
the National Best Bid (‘‘NBB’’), or a NBB
that equals the upper price band and
does not cross the NBO. When an NMS
Stock enters a Limit State, the Processor
will disseminate the information by
identifying the relevant quotation (i.e., a
NBO that equals the Lower Price Band
or a NBB that equals the Upper Price
Band) as a Limit State Quotation,14 and
Responses to the Market Events of May 6, 2010’’
(Feb, 18, 2011).
7 See Securities Exchange Act Release No. 34–
67091 (May 31, 2012), 77 FR 33498 (June 6, 2012).
8 See 17 CFR 242.600(b)(47).
9 As defined by Section I.(N) of the Plan.
10 As defined by Section I.(T) the Plan.
11 As defined by Section I.(A) the Plan.
12 As defined by Section I.(C) the Plan.
13 As defined by Section I.(Y) the Plan.
14 As defined by Section I.(D) the Plan.
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ceases to calculate and disseminate
updated Reference Prices and Price
Bands for the NMS Stock until either
trading exits the Limit State or trading
resumes with an opening or re-opening.
An NMS Stock will exit a Limit State if,
within 15 seconds of entering the Limit
State, the entire size of all Limit State
Quotations are executed or cancelled, at
which time the Processor begins to
calculate and disseminate updated Price
Bands based on a Reference Price that
equals the arithmetic mean price of
Eligible Reported Transactions for the
NMS Stock over the immediately
preceding five-minute period (including
the period of the Limit State). If trading
for an NMS Stock does not exit a Limit
State within fifteen seconds of entry, the
Limit State will terminate when the
Primary Listing Exchange declares a
Trading Pause, or at the end of Regular
Trading Hours.
The Primary Listing Exchange must
declare a Trading Pause if a [sic] NMS
Stock does not exit a Limit State within
fifteen seconds of entry during Regular
Market Hours. The Primary Listing
Exchange may also declare a Trading
Pause for an NMS Stock if the NMS
Stock is in a Straddle State, which is
when the NBB is below the Lower Price
Band or the NBO is above the Upper
Price Band, the NMS Stock is not in a
Limit State, and trading in that NMS
Stock deviates from normal trading
characteristics such that declaring a
Trading Pause would support the Plan’s
goal to address extraordinary market
volatility. The Primary Listing Exchange
is responsible for declaring a Trading
Pause in an NMS Stock and informing
the Processor and during a Trading
Pause the Processor disseminates
Trading Pause information to the public.
During a Trading Pause, no trades in a
NMS Stock may occur, but all bids and
offers may be displayed. A Trading
Pause will conclude in one of two ways.
First, if after five minutes from
declaration of the Trading Pause the
Primary Listing Exchange has not
declared a Regulatory Halt, it will
initiate established re-opening
procedures. The Trading Pause will
conclude when the Primary Listing
Exchange reports a Reopening Price.
Alternatively, a Trading Pause will
conclude if the Primary Listing
Exchange does not report a Reopening
Price within ten minutes after the
declaration of a Trading Pause in a NMS
Stock, and has not declared a Regulatory
Halt. When trading resumes after a
Trading Pause, the Processor then will
update the Prices Bands.
The Exchange believes that the Limit
Up-Limit Down Plan has been
successful at addressing extraordinary
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Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
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Proposal
The Exchange is proposing to
implement a new rebate program
designed to provide incentive to market
participants to provide liquidity during
Limit States, Straddle States and
Trading Pause [sic] in a select group of
NMS Stocks chosen by the Exchange
(‘‘LULD Liquidity Symbols’’). The new
incentive program is being proposed in
light of the Committee’s
recommendation that exchanges adopt a
‘‘peak load’’ pricing model as a solution
to encouraging liquidity during
turbulent markets.19 In its purest form,
a peak load pricing model increases
both fees and rebates to improve
liquidity. A higher access fee in
comparison to other exchanges may
discourage entry of aggressive liquidityremoving trades. By contrast, a higher
rebate in comparison to other markets
may encourage entry of liquidityproviding limit orders. Under
Regulation NMS, exchanges are limited
in level of access fees that they may
assess their members. The Exchange’s
access fee schedule under Rule 7018(a)
provides that, under certain
circumstances, removal of displayed
liquidity is assessed as the highest
15 See
Supra note 6.
Report at 36.
17 See Supra note 6 at 9.
18 Id.
19 Id.
16 See
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permissible rate. As consequence, any
additional fee for removal of liquidity
would exceed that limit. Exchanges are
not so constrained, however, in level of
rebate provided for liquidity.
The Exchange agrees with the
Committee that more must be done to
encourage liquidity during times of
market stress, and providing market
participants with incentives to provide
liquidity may further that goal. While
the Exchange is limited in the level of
fee-based disincentives that it can assess
for liquidity removal during turbulent
markets, the Exchange is able to adopt
incentives to address the Committee’s
concern that there are insufficient
incentives to market participants to
provide displayed liquidity in such
markets. Specifically, the Exchange is
proposing to provide two new
incentives that are focused on
promoting liquidity when a LULD
Liquidity Symbol is in a Limit State,
Straddle State, or a Trading Pause. 20
The Exchange has selected a group of
200 LULD Liquidity Symbols that are
Exchange-listed stocks and ETFs of
various sizes based on market
capitalization. In selecting the
securities, the Exchange first considered
how individual Exchange-listed
securities were impacted on particularly
volatile days, and when a Limit State,
Straddle State or Trading Pause
occurred, with a particular focus on
liquidity. From this pool of potential
LULD Liquidity Symbols, the Exchange
next eliminated very low volume stocks
that frequently have LULD bands based
on bid-ask midpoint rather than a trade
price. Last, the Exchange used stratified
random sampling of the remaining pool
of potential LULD Liquidity Symbols to
assure that the stocks represented a
wide range of market capitalization
levels. The Exchange may add to or
modify the list of securities covered by
the Limit Up-Limit Down Pricing
Program. To the extent the Exchange
determines to modify the list of LULD
Liquidity Symbol, it will file a rule
change proposal with the Commission.
In selecting new LULD Liquidity
Symbols, the Exchange will apply the
same criteria used in selecting the initial
group of LULD Liquidity Symbols.
First, for LULD Liquidity Symbol
securities priced $1 or more the
Exchange is adopting an incentive in the
form of a $0.0010 per share executed
rebate to Exchange market makers that
enter displayed orders to buy (other
than Designated Retail Orders, as
defined in Rule 7018) when the LULD
Liquidity Symbol security enters a Limit
State based on an NBO that equals the
lower price band and does not cross the
NBB (‘‘Limit Down Limit State’’). To be
eligible, the market maker must be
registered as a market maker for the
LULD Liquidity Symbol. The Exchange
believes the incentive will promote
liquidity in LULD Liquidity Symbols
during times of significant price
declines in those securities, which is
typically a time when buy liquidity is
scarce. The rebate will be provided to
all buy orders entered by an Exchange
market maker priced at or higher than
the Lower Price Band of the Limit Down
Limit State entered after initiation
thereof until its conclusion, and that
add liquidity at any time during
continuous trading.21 Similarly, for
LULD Liquidity Symbol securities
priced $1 or more the Exchange will
provide the $0.0010 per share executed
rebate to Exchange market makers that
enter displayed orders to buy (other
than Designated Retail Orders, as
defined in Rule 7018) when the LULD
Liquidity Symbol security enters a
Straddle State based on an NBB that is
below the lower price band (‘‘Limit
Down Straddle State’’). To be eligible,
the market maker must be registered as
a market maker for the LULD Liquidity
Symbol. The rebate will be provided to
all buy orders entered by an Exchange
market maker priced at or higher than
the Lower Price Band of the Limit Down
Straddle State entered after initiation
thereof until its conclusion, and that
receive an execution any time after the
order is entered during regular market
hours, except for executions received in
subsequent Halt Crosses or Closing
Cross. The Exchange will use the time
that it receives the message from the
Processor that a LULD Liquidity Symbol
is in a Limit Down Limit State or Limit
Down Straddle State as the time at
which the rebate is available, and the
message from the Processor that the
security has emerged from the Limit
Down Limit State or Limit Down
Straddle State as the time at which the
rebate is no longer available.
The following is an example of how
the rebate will be applied. For this
example market maker refers to an
Exchange market maker registered in
symbol ABC. Assume symbol ABC has
a lower price band of $10.00 and is a
LULD Liquidity Symbol. Further
20 The Exchange notes that nothing proposed in
this rule change will alter how the Exchange
handles quotes and orders in compliance with
Regulation NMS, including member obligations
with respect to avoiding quotes and orders that lock
or cross the markets.
volatility in the markets, through its
combination of price bands and trading
pauses. A fundamental underpinning to
re-establishing a less volatile and stable
market in times of market stress is
liquidity. As quoted above, Staff
observed that a liquidity crisis arising
from the withdrawal of market
participants can lead to the breakdown
of a fair and orderly price-discovery
process.15 There is great risk to market
participants when markets are volatile
and many firms employ their own
versions of a trading pause to withdraw
from the markets as risk mitigation.16 In
its analysis of the flash crash, Staff
observed that the markets suffered
significant reductions in liquidity as
prices fell, particularly evidenced by a
significant reduction in buy-side market
depth. The lack of adequate incentives
to address such liquidity crisis is a
concern of the Committee, which noted
in its report that ‘‘incentives to display
liquidity may be deficient in [a] normal
market, and are seriously deficient in
turbulent markets.’’ 17 Arising from this
concern, the Committee recommended
that the CFTC and SEC ‘‘consider
incentives to supply liquidity that vary
with market conditions.’’ 18
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30383
21 Orders are considered to have added liquidity
if they are posted on the Exchange book and are
executed during continuous trading. Executions
during a Halt, IPO, Open, and Closing Crosses are
note considered to have added or removed
liquidity.
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assume the Exchange is the only market
with a displayed offer at $10.00 for 300
shares and the Exchange has received
the message from the Processor that
ABC is in a Limit Down Limit State.
Market maker #1 enters a 1,000 share
displayable buy order priced at $10.00.
Market maker #1’s order trades against
the 300 shares offered and the
remaining 700 shares post to the
Exchange’s book at $10.00. The Bid on
the Exchange is now $10.00. The 700
shares from market maker #1 are eligible
to receive the additional $0.0010 rebate
per share executed when adding
liquidity. Market maker #2 enters a 200
share displayable buy order at $10.00.
The 200 shares are also eligible to
receive the additional $0.0010 rebate
when adding liquidity. The Exchange
receives the message from the Processor
that the security has emerged from the
Limit Down Limit State. Market maker
#3 enters a 100 share displayable buy
order at $10.00. The 100 shares are not
eligible to receive the additional
$0.0010 rebate since the Exchange has
already received the message from the
Processor that the security has emerged
from the Limit Down Limit State.
Market maker #1 and #2’s posted orders
are still eligible to receive the $0.0010
per share rebate if the orders add
liquidity at a later point.
Second, the Exchange is proposing to
provide an incentive to all market
participants that enter Orders in an
LULD Liquidity Symbol during a
Trading Pause and receive an execution
of that Order. The Exchange will
provide a $0.0005 per share executed
rebate, which will be provided upon
execution of the eligible Order in the
reopening process at the conclusion of
the Trading Pause. The rebate will be
provided in lieu of the fee assessed
under Rule 7018(f) for execution of
quotes and orders executed halt
crosses.22 Unlike the proposed $0.0010
per share executed rebate, which
focuses on providing incentive to
Exchange Market Makers to provide
liquidity when the price of a LULD
Liquidity Symbol has dropped
significantly, this proposed $0.0005 per
share executed rebate targets all market
participants during a Trading Pause.
The Exchange will use the time at
which it declares a Trading Pause in the
LULD Liquidity Symbol up to the point
at which it completes the halt cross in
the security as the time during which
22 Under Rule 7018(f), a member is assessed a
$0.0010 per share executed fee for any quote or
order that receives an execution in a halt cross,
which includes a Limit Up-Limit Down trading
pause halt cross.
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18:48 May 13, 2016
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orders are eligible to receive the $0.0005
per share executed rebate
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6 of the Act,23 in general, and
furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,24 in
particular, in that it provides for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility or system which the Exchange
operates or controls, and is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, 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; and
are not designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers. As a general
principle, the Exchange applies rebates
and reduced fees in an effort to promote
beneficial market-improving behavior
among market participants. Under Rule
7014, the Exchange currently provides
four Market Quality Incentive Programs
that are designed to improve the
markets by providing rebates and
reduced fees as incentive to market
participants. The proposed Limit UpLimit Down Pricing Program is
consistent with these other marketimproving programs because it is
designed to promote liquidity when
liquidity is scarce and most needed. The
proposed program is also consistent
with recommendations made by the
Committee to support trading during
events when there is a shortage of
liquidity. The Exchange is proposing to
offer the program for a period no less
than six months from its adoption so
that it can measure the effectiveness of
the rebates.
Market Maker Rebate
The Exchange believes that the
proposed $0.0010 per share executed
rebate is reasonable because it rewards
market makers for providing liquidity
when the price of a security is falling
significantly and many market
participants have withdrawn. As
discussed above, a stock that is in a
Limit Down Limit State or Limit Down
Straddle State has experienced a
23 15
24 15
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U.S.C. 78f(b)(4) and (5).
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significant drop in a relatively short
time. It has been the Exchange’s
observation that Limit Down Limit
States and Limit Down Straddle States
on the lower band are often
characterized by a significant disparity
between the number of buyers and
sellers. Orders that provide buy side
liquidity promote price discovery and
help to normalize trading. The proposed
rebate is designed to support buy side
liquidity during Limit Down Limit
States and Limit Down Straddle States
in LULD Liquidity Symbols by
providing market makers with an
incentive to provide bids at or above the
Limit Down Price band. The proposed
rebate may also provide incentive to
Members to register as market makers in
the LULD Liquidity Symbols so that
they may avail themselves of the rebate,
thereby potentially improving overall
market quality in such securities.
Moreover, the Exchange believes that
the proposed $0.0010 per share
executed rebate is reasonable because it
is consistent with rebates of other
market quality incentive programs
under Rule 7014. While the Exchange
acknowledges that the $0.0010 per share
executed rebate is significantly higher
than provided by most incentive
programs under Rule 7014, which
provide additional rebates ranging from
$0.0001 to $0.0004 per share executed,
the Exchange notes that the Lead Market
Maker (‘‘LMM’’) Program under Rule
7014 provides rebates in Qualified
Securities to LMMs for adding
displayed liquidity ranging from
$0.0040 to $0.0046 per share executed,
depending on the qualification criteria
met.25 The rebate under the LMM
Program is provided in lieu of the
rebates provided under Rule 7018(a) for
providing displayed liquidity, which are
as high as $0.00305 per share executed.
Thus, the lowest effective rebate
available to a LMM under the LMM
Program is $0.00095 ($0.0040—
$0.00305). Consequently, the Exchange
believes that the proposed $0.0010 per
share executed rebate is reasonable
because it is similar to the rebates
provided under the LMM Program.
The Exchange believes that the
proposed rebate is an equitable
allocation and is not unfairly
discriminatory because the Exchange
will provide the same rebate to all
similarly situated market makers. The
Exchange believes that limiting the
$0.0010 per share executed rebate to
registered market makers is an equitable
allocation and is not unfairly
discriminatory because the incentive
may encourage Members to register as
25 See
E:\FR\FM\16MYN1.SGM
Rule 7014(d) and (e).
16MYN1
Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
market makers in LULD Liquidity
Symbols. Market makers have certain
quoting and pricing obligations 26 for
the securities in which they are
registered; however, such obligations do
not require them to enter buy orders
priced at or higher than the Lower Price
Band of the Limit Down Limit State or
Limit Down Straddle State. The
proposed $0.0010 per share executed
rebate is designed to incentivize market
makers to provide liquidity in LULD
Liquidity Symbols for which they are
registered as market makers at a price
higher than they would otherwise be
obligated in order to satisfy their market
making obligations. Moreover, an
increased number of market makers
registered in LULD Liquidity Symbols
may increase the potential for improved
liquidity in LULD Liquidity Symbols
during Limit States, and may improve
overall market quality in LULD
Liquidity Symbols because of market
makers’ quoting and pricing obligations,
which would benefit all market
participants that trade LULD Liquidity
Symbols.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Trading Pause Rebate
The Exchange believes that the
proposed $0.0005 per share executed
rebate provided to members that enter
Orders in a LULD Liquidity Symbol
during a Trading Pause and receive an
execution of that Order is reasonable
because it may provide incentive to all
market participants to provide liquidity
during a Trading Pause in the securities
of the program. The Exchange believes
that all participants that provide
liquidity during a Trading Pause should
be rewarded for taking on the risk of
entering orders during a volatile market.
These orders promote price discovery,
which may in turn help reestablish
normal trading in a security covered by
the program. Moreover, the Exchange
believes that the proposed $0.0005 per
share executed rebate is reasonable
because it is consistent with rebates of
other market quality incentive programs
under Rule 7014, which provide
additional rebates ranging from $0.0001
to $0.0004 per share executed. Unlike
those rebates, which are provided in
addition to any fee or other rebate the
member may receive under Rule 7018,
the proposed $0.0005 per share
executed rebate is provided in lieu of
26 Rule 4613 requires market maker to be willing
to buy and sell a security that it is registered as such
on a continuous basis during regular market hours
and to enter and maintain a two-sided trading
interest that is identified to the Exchange as the
interest meeting the obligation and is displayed in
the Exchange’s quotation montage at all times.
Exchange market makers must also adhere to
certain pricing obligations in their registered
securities, as established by Rule 4613.
VerDate Sep<11>2014
18:48 May 13, 2016
Jkt 238001
the $0.0010 per share executed fee
assessed for executions in halt crosses,
including a Limit Up-Limit Down
trading pause halt cross. As a
consequence, a member that qualifies
for the proposed new rebate will receive
a net benefit of $0.0015 per share
executed. The Exchange notes that this
net benefit is similar to the net benefit
provided LMMs under the LMM
Program. Specifically, an LMM that
meets the highest performance criteria
under the LMM Program is eligible to
receive no charge for executions in the
Halt Cross, Opening Cross and Closing
Cross. In certain circumstances, a
member may be assessed a charge of
$0.0015 per share executed for
participation in the Opening and
Closing Crosses. Thus, the net benefit
provided by the proposed $0.0005 per
share executed rebate is reasonable. The
Exchange believes that the proposed
$0.0005 per share executed rebate is an
equitable allocation and is not unfairly
discriminatory because the Exchange
will provide the rebate to all members
that provide orders during a Trading
Pause in a LULD Liquidity Symbol that
receive an execution
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. In terms of
inter-market competition, the Exchange
notes that it operates in a highly
competitive market in which market
participants can readily favor competing
venues if they deem fee levels at a
particular venue to be excessive, or
rebate opportunities available at other
venues to be more favorable. In such an
environment, the Exchange must
continually adjust its fees to remain
competitive with other exchanges and
with alternative trading systems that
have been exempted from compliance
with the statutory standards applicable
to exchanges. Because competitors are
free to modify their own fees in
response, and because market
participants may readily adjust their
order routing practices, the Exchange
believes that the degree to which fee
changes in this market may impose any
burden on competition is extremely
limited.
In this instance, the Exchange is
offering rebates in an effort to improve
market quality during times of high
volatility. The Exchange does not
believe that the proposed change will
place a burden on inter-market
competition because the Limit Up-Limit
Down Pricing Program is designed to
PO 00000
Frm 00149
Fmt 4703
Sfmt 4703
30385
improve market quality for all market
participants by promoting price
discovery for LULD Liquidity Symbols
that have triggered Limit Up-Limit
Down processes, and other exchanges
are free to offer similar programs. If
successful, the proposed Limit Up-Limit
Down Pricing Program may promote
competition among exchanges to
provide incentives of their own to
address low liquidity in NMS Stocks
during a Limit Up-Limit Down process.
Further, the Exchange does not believe
that the proposed incentive program
imposes a burden on competition
among market participants because
participation in the market during a
Limit Up-Limit Down Limit State,
Straddle State, or Trading Pause is
completely voluntary. Moreover, the
proposed incentive program will not be
a burden on competition among market
participants because the Exchange is
offering a rebate to all members that
qualify under the program. The
Exchange notes that it is limiting the
$0.0010 per share executed rebate to
Exchange market makers registered in
LULD Liquidity Symbols as an incentive
to such market makers to provide
liquidity priced better than they
otherwise would be required to do so as
market makers. In addition, the proposal
may incentivize market participants to
register as market makers with the
Exchange. Providing incentive to
members to become market makers will
benefit all market participants trading in
LULD Liquidity Symbols for the reasons
discussed above. In this regard, all
member firms may register as market
makers in the LULD Liquidity Symbols
if they choose to meet the qualification
criteria. Accordingly, the Exchange does
not believe that the proposed changes
will impair the ability of members or
competing order execution venues to
maintain their competitive standing in
the financial markets.
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
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.27
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
27 15
E:\FR\FM\16MYN1.SGM
U.S.C. 78s(b)(3)(A)(ii).
16MYN1
30386
Federal Register / Vol. 81, No. 94 / Monday, May 16, 2016 / Notices
All submissions should refer to File
Number SR–NASDAQ–2016–065 and
should be submitted on or before June
6, 2016.
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.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Robert W. Errett,
Deputy Secretary.
IV. Solicitation of Comments
[FR Doc. 2016–11411 Filed 5–13–16; 8:45 am]
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:
BILLING CODE 8011–01–P
Electronic Comments
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77795; File No. SR–ISE
Gemini–2016–05]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing of
Proposed Rule Change Relating to a
Corporate Transaction Involving Its
Indirect Parent
Paper Comments
asabaliauskas on DSK3SPTVN1PROD with NOTICES
• 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–2016–065 on the subject line.
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 April 28,
2016 ISE Gemini, LLC (the ‘‘Exchange’’
or ‘‘ISE Gemini’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change, as described in Items I, II, and
III below, which items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2016–065. 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.
VerDate Sep<11>2014
18:48 May 13, 2016
Jkt 238001
May 10, 2016.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is hereby filing with
the U.S. Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change (the ‘‘Proposed
Rule Change’’) in connection with a
proposed business transaction (the
‘‘Transaction’’) involving the Exchange’s
ultimate, indirect, non-U.S. upstream
¨
owners, Deutsche Borse AG (‘‘Deutsche
¨
Borse’’) and Eurex Frankfurt AG (‘‘Eurex
Frankfurt’’), and Nasdaq, Inc.
(‘‘Nasdaq’’). Nasdaq is the parent
company of The NASDAQ Stock Market
LLC (‘‘NASDAQ Exchange’’), NASDAQ
PHLX LLC (‘‘Phlx Exchange’’),
NASDAQ BX, Inc. (‘‘BX Exchange’’),
Boston Stock Exchange Clearing
Corporation (‘‘BSECC’’) and Stock
Clearing Corporation of Philadelphia
28 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00150
Fmt 4703
Sfmt 4703
(‘‘SCCP’’).3 Upon completion of the
Transaction (the ‘‘Closing’’), the
Exchange’s indirect parent company,
U.S. Exchange Holdings, Inc. (‘‘U.S.
Exchange Holdings’’), will become a
direct subsidiary of Nasdaq. The
Exchange will therefore become an
indirect subsidiary of Nasdaq and, in
addition to the Exchange’s current
affiliation with International Securities
Exchange, LLC (‘‘ISE’’) and ISE
Mercury, LLC (‘‘ISE Mercury’’), an
affiliate of NASDAQ Exchange, Phlx
Exchange, BX Exchange, BSECC and
SCCP through common, ultimate
ownership by Nasdaq. Nasdaq will
become the ultimate parent of the
Exchange.4
In order to effect the Transaction, the
Exchange hereby seeks the
Commission’s approval of the following:
(i) That certain corporate resolutions
that were previously established by
entities that will cease to be non-U.S.
upstream owners of the Exchange after
the Transaction will cease to be
considered rules of the Exchange upon
Closing; (ii) that certain governing
documents of Nasdaq will be considered
rules of the Exchange upon Closing; (iii)
that the Third Amended and Restated
Trust Agreement (the ‘‘Trust
Agreement’’) that currently exists among
International Securities Exchange
Holdings, Inc. (‘‘ISE Holdings’’), U.S.
Exchange Holdings, and the Trustees (as
defined therein) with respect to the ‘‘ISE
Trust’’ will cease to be considered rules
of the Exchange upon Closing and,
thereafter, that the parties to the Trust
Agreement would be permitted to take
the corporate steps necessary to repeal
the Trust Agreement and dissolve the
ISE Trust; (iv) to amend and restate the
Second Amended and Restated
Certificate of Incorporation of ISE
Holdings (‘‘ISE Holdings COI’’) to
eliminate provisions relating to the
Trust Agreement and the ISE Trust and,
in this respect, to reinstate certain text
of the ISE Holdings COI that existed
¨
prior to Deutsche Borse’s ownership of
ISE Holdings; (v) to amend and restate
the Second Amended and Restated
Bylaws of ISE Holdings (the ‘‘ISE
Holdings Bylaws’’) to waive certain
voting and ownership restrictions in the
ISE Holdings COI to permit Nasdaq to
indirectly own 100% of the outstanding
3 See Securities Exchange Act Release Nos. 58179
(July 17, 2008), 73 FR 42874 (July 23, 2008) (SR–
Phlx–2008–31); 58324 (August 7, 2008), 73 FR
46936 (August 12, 2008) (SR–BSE–2008–02; SR–
BSE–2008–23; SR–BSE–2008–25; SR–BSECC–2008–
01).
4 The Exchange’s current affiliates, ISE and ISE
Mercury, have submitted nearly identical proposed
rule changes. See SR–ISE–2016–11 and SR–
ISEMercury–2016–10.
E:\FR\FM\16MYN1.SGM
16MYN1
]]>Agencies
[Federal Register Volume 81, Number 94 (Monday, May 16, 2016)]
[Notices]
[Pages 30381-30386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11411]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77800; File No. SR-NASDAQ-2016-065]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to
Adopt a New Limit Up-Limit Down Pricing Program Under Rule 7014
May 10, 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 May 3, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a proposal to adopt a new Limit Up-Limit Down
Pricing Program under Rule 7014 to improve liquidity during Limit Up-
Limit Down events through incentive rebates.
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
[[Page 30382]]
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 is proposing to adopt a new Limit Up-Limit Down
Pricing Program under Rule 7014 to improve liquidity during Limit Up-
Limit Down events pursuant to Rule 4120(a)(12) through incentive
rebates.
Background
On May 6, 2010, the U.S. markets experienced excessive volatility
in an abbreviated time period, commonly referred to as the ``flash
crash.'' Many of the almost 8,000 equity securities and exchange-traded
funds (``ETFs'') traded that day experienced rapid price declines and
reversals within a short period of time. Staff of the SEC and the U.S.
Commodity Futures Trading Commission (``CFTC'') (collectively,
``Staff'') worked together to study the events of the flash crash,
issuing a report of their findings (``Report'') to the Joint CFTC-SEC
Advisory Committee on Emerging Regulatory Issues (``Committee'').\3\
Staff observed, among other things, that there was a ``liquidity
crisis'' with respect to individual stocks, whereby market participants
widened quote spreads, reduced offered liquidity, or withdrew from the
markets altogether.\4\ Staff stated that:
---------------------------------------------------------------------------
\3\ See Report of the Staffs of the CFTC and SEC to the Joint
Advisory Committee on Emerging Regulatory Issues, ``Findings
Regarding the Market Events of May 6, 2010,'' dated September 30,
2010, available at https://www.sec.gov/news/studies/2010/marketevents-report.pdf.
\4\ See Report at 5.
---------------------------------------------------------------------------
While the withdrawal of a single participant may not
significantly impact the entire market, a liquidity crisis can
develop if many market participants withdraw at the same time. This,
in turn, can lead to the breakdown of a fair and orderly price-
discovery process, and in the extreme case trades can be executed at
stub-quotes used by market makers to fulfill their continuous two-
sided obligations.\5\
---------------------------------------------------------------------------
\5\ Report at 6.
The Committee, in turn, issued a series of recommendations based on
its analysis of Staff's findings.\6\
---------------------------------------------------------------------------
\6\ See Summary Report of the Committee, ``Recommendations
Regarding Regulatory Responses to the Market Events of May 6, 2010''
(Feb, 18, 2011).
---------------------------------------------------------------------------
In response to the market structure issues uncovered by the flash
crash and the recommendations of the Committee, the exchanges and FINRA
(collectively, the ``SROs'') implemented market-wide measures designed
to restore investor confidence by reducing the potential for excessive
market volatility. One such measure was the adoption of a pilot plan
for stock-by-stock trading pauses by SROs. On May 31, 2012, the SEC
approved the National Market System Plan to Address Extraordinary
Market Volatility, commonly referred to as the ``Limit Up-Limit Down
Plan.'' \7\ The Limit Up-Limit Down Plan created a market-wide limit
up-limit down mechanism intended to address extraordinary market
volatility in ``NMS Stocks,'' as defined in Rule 600(b)(47) of
Regulation NMS under the Act.\8\ The Limit Up-Limit Down Plan is
designed to prevent trades in individual NMS Stocks from occurring
outside of specified Price Bands,\9\ which are based on a Reference
Price \10\ for each NMS Stock that equals the arithmetic mean price of
Eligible Reported Transactions \11\ for the NMS Stock over the
immediately preceding five-minute period (except for periods following
openings and re-openings). The Price Bands are disseminated by the
single plan processor responsible for the consolidation of information
for an NMS Stock (``Processor'') pursuant to Rule 603(b) of Regulation
NMS.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 34-67091 (May 31,
2012), 77 FR 33498 (June 6, 2012).
\8\ See 17 CFR 242.600(b)(47).
\9\ As defined by Section I.(N) of the Plan.
\10\ As defined by Section I.(T) the Plan.
\11\ As defined by Section I.(A) the Plan.
---------------------------------------------------------------------------
The Limit Up-Limit Down Plan prevents trades in individual NMS
Stocks from occurring outside of the Price Bands by applying Limit
States,\12\ whereby trading is permitted to continue within certain
upper and lower limits, and Trading Pauses \13\ to accommodate more
fundamental price moves in an NMS Stock. An NMS Stock will enter a
Limit State if it has a National Best Offer (``NBO'') that equals the
lower price band and does not cross the National Best Bid (``NBB''), or
a NBB that equals the upper price band and does not cross the NBO. When
an NMS Stock enters a Limit State, the Processor will disseminate the
information by identifying the relevant quotation (i.e., a NBO that
equals the Lower Price Band or a NBB that equals the Upper Price Band)
as a Limit State Quotation,\14\ and ceases to calculate and disseminate
updated Reference Prices and Price Bands for the NMS Stock until either
trading exits the Limit State or trading resumes with an opening or re-
opening. An NMS Stock will exit a Limit State if, within 15 seconds of
entering the Limit State, the entire size of all Limit State Quotations
are executed or cancelled, at which time the Processor begins to
calculate and disseminate updated Price Bands based on a Reference
Price that equals the arithmetic mean price of Eligible Reported
Transactions for the NMS Stock over the immediately preceding five-
minute period (including the period of the Limit State). If trading for
an NMS Stock does not exit a Limit State within fifteen seconds of
entry, the Limit State will terminate when the Primary Listing Exchange
declares a Trading Pause, or at the end of Regular Trading Hours.
---------------------------------------------------------------------------
\12\ As defined by Section I.(C) the Plan.
\13\ As defined by Section I.(Y) the Plan.
\14\ As defined by Section I.(D) the Plan.
---------------------------------------------------------------------------
The Primary Listing Exchange must declare a Trading Pause if a
[sic] NMS Stock does not exit a Limit State within fifteen seconds of
entry during Regular Market Hours. The Primary Listing Exchange may
also declare a Trading Pause for an NMS Stock if the NMS Stock is in a
Straddle State, which is when the NBB is below the Lower Price Band or
the NBO is above the Upper Price Band, the NMS Stock is not in a Limit
State, and trading in that NMS Stock deviates from normal trading
characteristics such that declaring a Trading Pause would support the
Plan's goal to address extraordinary market volatility. The Primary
Listing Exchange is responsible for declaring a Trading Pause in an NMS
Stock and informing the Processor and during a Trading Pause the
Processor disseminates Trading Pause information to the public. During
a Trading Pause, no trades in a NMS Stock may occur, but all bids and
offers may be displayed. A Trading Pause will conclude in one of two
ways. First, if after five minutes from declaration of the Trading
Pause the Primary Listing Exchange has not declared a Regulatory Halt,
it will initiate established re-opening procedures. The Trading Pause
will conclude when the Primary Listing Exchange reports a Reopening
Price. Alternatively, a Trading Pause will conclude if the Primary
Listing Exchange does not report a Reopening Price within ten minutes
after the declaration of a Trading Pause in a NMS Stock, and has not
declared a Regulatory Halt. When trading resumes after a Trading Pause,
the Processor then will update the Prices Bands.
The Exchange believes that the Limit Up-Limit Down Plan has been
successful at addressing extraordinary
[[Page 30383]]
volatility in the markets, through its combination of price bands and
trading pauses. A fundamental underpinning to re-establishing a less
volatile and stable market in times of market stress is liquidity. As
quoted above, Staff observed that a liquidity crisis arising from the
withdrawal of market participants can lead to the breakdown of a fair
and orderly price-discovery process.\15\ There is great risk to market
participants when markets are volatile and many firms employ their own
versions of a trading pause to withdraw from the markets as risk
mitigation.\16\ In its analysis of the flash crash, Staff observed that
the markets suffered significant reductions in liquidity as prices
fell, particularly evidenced by a significant reduction in buy-side
market depth. The lack of adequate incentives to address such liquidity
crisis is a concern of the Committee, which noted in its report that
``incentives to display liquidity may be deficient in [a] normal
market, and are seriously deficient in turbulent markets.'' \17\
Arising from this concern, the Committee recommended that the CFTC and
SEC ``consider incentives to supply liquidity that vary with market
conditions.'' \18\
---------------------------------------------------------------------------
\15\ See Supra note 6.
\16\ See Report at 36.
\17\ See Supra note 6 at 9.
\18\ Id.
---------------------------------------------------------------------------
Proposal
The Exchange is proposing to implement a new rebate program
designed to provide incentive to market participants to provide
liquidity during Limit States, Straddle States and Trading Pause [sic]
in a select group of NMS Stocks chosen by the Exchange (``LULD
Liquidity Symbols''). The new incentive program is being proposed in
light of the Committee's recommendation that exchanges adopt a ``peak
load'' pricing model as a solution to encouraging liquidity during
turbulent markets.\19\ In its purest form, a peak load pricing model
increases both fees and rebates to improve liquidity. A higher access
fee in comparison to other exchanges may discourage entry of aggressive
liquidity-removing trades. By contrast, a higher rebate in comparison
to other markets may encourage entry of liquidity-providing limit
orders. Under Regulation NMS, exchanges are limited in level of access
fees that they may assess their members. The Exchange's access fee
schedule under Rule 7018(a) provides that, under certain circumstances,
removal of displayed liquidity is assessed as the highest permissible
rate. As consequence, any additional fee for removal of liquidity would
exceed that limit. Exchanges are not so constrained, however, in level
of rebate provided for liquidity.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
The Exchange agrees with the Committee that more must be done to
encourage liquidity during times of market stress, and providing market
participants with incentives to provide liquidity may further that
goal. While the Exchange is limited in the level of fee-based
disincentives that it can assess for liquidity removal during turbulent
markets, the Exchange is able to adopt incentives to address the
Committee's concern that there are insufficient incentives to market
participants to provide displayed liquidity in such markets.
Specifically, the Exchange is proposing to provide two new incentives
that are focused on promoting liquidity when a LULD Liquidity Symbol is
in a Limit State, Straddle State, or a Trading Pause. \20\ The Exchange
has selected a group of 200 LULD Liquidity Symbols that are Exchange-
listed stocks and ETFs of various sizes based on market capitalization.
In selecting the securities, the Exchange first considered how
individual Exchange-listed securities were impacted on particularly
volatile days, and when a Limit State, Straddle State or Trading Pause
occurred, with a particular focus on liquidity. From this pool of
potential LULD Liquidity Symbols, the Exchange next eliminated very low
volume stocks that frequently have LULD bands based on bid-ask midpoint
rather than a trade price. Last, the Exchange used stratified random
sampling of the remaining pool of potential LULD Liquidity Symbols to
assure that the stocks represented a wide range of market
capitalization levels. The Exchange may add to or modify the list of
securities covered by the Limit Up-Limit Down Pricing Program. To the
extent the Exchange determines to modify the list of LULD Liquidity
Symbol, it will file a rule change proposal with the Commission. In
selecting new LULD Liquidity Symbols, the Exchange will apply the same
criteria used in selecting the initial group of LULD Liquidity Symbols.
---------------------------------------------------------------------------
\20\ The Exchange notes that nothing proposed in this rule
change will alter how the Exchange handles quotes and orders in
compliance with Regulation NMS, including member obligations with
respect to avoiding quotes and orders that lock or cross the
markets.
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First, for LULD Liquidity Symbol securities priced $1 or more the
Exchange is adopting an incentive in the form of a $0.0010 per share
executed rebate to Exchange market makers that enter displayed orders
to buy (other than Designated Retail Orders, as defined in Rule 7018)
when the LULD Liquidity Symbol security enters a Limit State based on
an NBO that equals the lower price band and does not cross the NBB
(``Limit Down Limit State''). To be eligible, the market maker must be
registered as a market maker for the LULD Liquidity Symbol. The
Exchange believes the incentive will promote liquidity in LULD
Liquidity Symbols during times of significant price declines in those
securities, which is typically a time when buy liquidity is scarce. The
rebate will be provided to all buy orders entered by an Exchange market
maker priced at or higher than the Lower Price Band of the Limit Down
Limit State entered after initiation thereof until its conclusion, and
that add liquidity at any time during continuous trading.\21\
Similarly, for LULD Liquidity Symbol securities priced $1 or more the
Exchange will provide the $0.0010 per share executed rebate to Exchange
market makers that enter displayed orders to buy (other than Designated
Retail Orders, as defined in Rule 7018) when the LULD Liquidity Symbol
security enters a Straddle State based on an NBB that is below the
lower price band (``Limit Down Straddle State''). To be eligible, the
market maker must be registered as a market maker for the LULD
Liquidity Symbol. The rebate will be provided to all buy orders entered
by an Exchange market maker priced at or higher than the Lower Price
Band of the Limit Down Straddle State entered after initiation thereof
until its conclusion, and that receive an execution any time after the
order is entered during regular market hours, except for executions
received in subsequent Halt Crosses or Closing Cross. The Exchange will
use the time that it receives the message from the Processor that a
LULD Liquidity Symbol is in a Limit Down Limit State or Limit Down
Straddle State as the time at which the rebate is available, and the
message from the Processor that the security has emerged from the Limit
Down Limit State or Limit Down Straddle State as the time at which the
rebate is no longer available.
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\21\ Orders are considered to have added liquidity if they are
posted on the Exchange book and are executed during continuous
trading. Executions during a Halt, IPO, Open, and Closing Crosses
are note considered to have added or removed liquidity.
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The following is an example of how the rebate will be applied. For
this example market maker refers to an Exchange market maker registered
in symbol ABC. Assume symbol ABC has a lower price band of $10.00 and
is a LULD Liquidity Symbol. Further
[[Page 30384]]
assume the Exchange is the only market with a displayed offer at $10.00
for 300 shares and the Exchange has received the message from the
Processor that ABC is in a Limit Down Limit State. Market maker #1
enters a 1,000 share displayable buy order priced at $10.00. Market
maker #1's order trades against the 300 shares offered and the
remaining 700 shares post to the Exchange's book at $10.00. The Bid on
the Exchange is now $10.00. The 700 shares from market maker #1 are
eligible to receive the additional $0.0010 rebate per share executed
when adding liquidity. Market maker #2 enters a 200 share displayable
buy order at $10.00. The 200 shares are also eligible to receive the
additional $0.0010 rebate when adding liquidity. The Exchange receives
the message from the Processor that the security has emerged from the
Limit Down Limit State. Market maker #3 enters a 100 share displayable
buy order at $10.00. The 100 shares are not eligible to receive the
additional $0.0010 rebate since the Exchange has already received the
message from the Processor that the security has emerged from the Limit
Down Limit State. Market maker #1 and #2's posted orders are still
eligible to receive the $0.0010 per share rebate if the orders add
liquidity at a later point.
Second, the Exchange is proposing to provide an incentive to all
market participants that enter Orders in an LULD Liquidity Symbol
during a Trading Pause and receive an execution of that Order. The
Exchange will provide a $0.0005 per share executed rebate, which will
be provided upon execution of the eligible Order in the reopening
process at the conclusion of the Trading Pause. The rebate will be
provided in lieu of the fee assessed under Rule 7018(f) for execution
of quotes and orders executed halt crosses.\22\ Unlike the proposed
$0.0010 per share executed rebate, which focuses on providing incentive
to Exchange Market Makers to provide liquidity when the price of a LULD
Liquidity Symbol has dropped significantly, this proposed $0.0005 per
share executed rebate targets all market participants during a Trading
Pause. The Exchange will use the time at which it declares a Trading
Pause in the LULD Liquidity Symbol up to the point at which it
completes the halt cross in the security as the time during which
orders are eligible to receive the $0.0005 per share executed rebate
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\22\ Under Rule 7018(f), a member is assessed a $0.0010 per
share executed fee for any quote or order that receives an execution
in a halt cross, which includes a Limit Up-Limit Down trading pause
halt cross.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act,\23\ in general, and furthers the objectives
of Sections 6(b)(4) and 6(b)(5) of the Act,\24\ in particular, in that
it provides for the equitable allocation of reasonable dues, fees and
other charges among members and issuers and other persons using any
facility or system which the Exchange operates or controls, and is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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; and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. As a general principle, the Exchange applies
rebates and reduced fees in an effort to promote beneficial market-
improving behavior among market participants. Under Rule 7014, the
Exchange currently provides four Market Quality Incentive Programs that
are designed to improve the markets by providing rebates and reduced
fees as incentive to market participants. The proposed Limit Up-Limit
Down Pricing Program is consistent with these other market-improving
programs because it is designed to promote liquidity when liquidity is
scarce and most needed. The proposed program is also consistent with
recommendations made by the Committee to support trading during events
when there is a shortage of liquidity. The Exchange is proposing to
offer the program for a period no less than six months from its
adoption so that it can measure the effectiveness of the rebates.
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\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(4) and (5).
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Market Maker Rebate
The Exchange believes that the proposed $0.0010 per share executed
rebate is reasonable because it rewards market makers for providing
liquidity when the price of a security is falling significantly and
many market participants have withdrawn. As discussed above, a stock
that is in a Limit Down Limit State or Limit Down Straddle State has
experienced a significant drop in a relatively short time. It has been
the Exchange's observation that Limit Down Limit States and Limit Down
Straddle States on the lower band are often characterized by a
significant disparity between the number of buyers and sellers. Orders
that provide buy side liquidity promote price discovery and help to
normalize trading. The proposed rebate is designed to support buy side
liquidity during Limit Down Limit States and Limit Down Straddle States
in LULD Liquidity Symbols by providing market makers with an incentive
to provide bids at or above the Limit Down Price band. The proposed
rebate may also provide incentive to Members to register as market
makers in the LULD Liquidity Symbols so that they may avail themselves
of the rebate, thereby potentially improving overall market quality in
such securities. Moreover, the Exchange believes that the proposed
$0.0010 per share executed rebate is reasonable because it is
consistent with rebates of other market quality incentive programs
under Rule 7014. While the Exchange acknowledges that the $0.0010 per
share executed rebate is significantly higher than provided by most
incentive programs under Rule 7014, which provide additional rebates
ranging from $0.0001 to $0.0004 per share executed, the Exchange notes
that the Lead Market Maker (``LMM'') Program under Rule 7014 provides
rebates in Qualified Securities to LMMs for adding displayed liquidity
ranging from $0.0040 to $0.0046 per share executed, depending on the
qualification criteria met.\25\ The rebate under the LMM Program is
provided in lieu of the rebates provided under Rule 7018(a) for
providing displayed liquidity, which are as high as $0.00305 per share
executed. Thus, the lowest effective rebate available to a LMM under
the LMM Program is $0.00095 ($0.0040--$0.00305). Consequently, the
Exchange believes that the proposed $0.0010 per share executed rebate
is reasonable because it is similar to the rebates provided under the
LMM Program.
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\25\ See Rule 7014(d) and (e).
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The Exchange believes that the proposed rebate is an equitable
allocation and is not unfairly discriminatory because the Exchange will
provide the same rebate to all similarly situated market makers. The
Exchange believes that limiting the $0.0010 per share executed rebate
to registered market makers is an equitable allocation and is not
unfairly discriminatory because the incentive may encourage Members to
register as
[[Page 30385]]
market makers in LULD Liquidity Symbols. Market makers have certain
quoting and pricing obligations \26\ for the securities in which they
are registered; however, such obligations do not require them to enter
buy orders priced at or higher than the Lower Price Band of the Limit
Down Limit State or Limit Down Straddle State. The proposed $0.0010 per
share executed rebate is designed to incentivize market makers to
provide liquidity in LULD Liquidity Symbols for which they are
registered as market makers at a price higher than they would otherwise
be obligated in order to satisfy their market making obligations.
Moreover, an increased number of market makers registered in LULD
Liquidity Symbols may increase the potential for improved liquidity in
LULD Liquidity Symbols during Limit States, and may improve overall
market quality in LULD Liquidity Symbols because of market makers'
quoting and pricing obligations, which would benefit all market
participants that trade LULD Liquidity Symbols.
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\26\ Rule 4613 requires market maker to be willing to buy and
sell a security that it is registered as such on a continuous basis
during regular market hours and to enter and maintain a two-sided
trading interest that is identified to the Exchange as the interest
meeting the obligation and is displayed in the Exchange's quotation
montage at all times. Exchange market makers must also adhere to
certain pricing obligations in their registered securities, as
established by Rule 4613.
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Trading Pause Rebate
The Exchange believes that the proposed $0.0005 per share executed
rebate provided to members that enter Orders in a LULD Liquidity Symbol
during a Trading Pause and receive an execution of that Order is
reasonable because it may provide incentive to all market participants
to provide liquidity during a Trading Pause in the securities of the
program. The Exchange believes that all participants that provide
liquidity during a Trading Pause should be rewarded for taking on the
risk of entering orders during a volatile market. These orders promote
price discovery, which may in turn help reestablish normal trading in a
security covered by the program. Moreover, the Exchange believes that
the proposed $0.0005 per share executed rebate is reasonable because it
is consistent with rebates of other market quality incentive programs
under Rule 7014, which provide additional rebates ranging from $0.0001
to $0.0004 per share executed. Unlike those rebates, which are provided
in addition to any fee or other rebate the member may receive under
Rule 7018, the proposed $0.0005 per share executed rebate is provided
in lieu of the $0.0010 per share executed fee assessed for executions
in halt crosses, including a Limit Up-Limit Down trading pause halt
cross. As a consequence, a member that qualifies for the proposed new
rebate will receive a net benefit of $0.0015 per share executed. The
Exchange notes that this net benefit is similar to the net benefit
provided LMMs under the LMM Program. Specifically, an LMM that meets
the highest performance criteria under the LMM Program is eligible to
receive no charge for executions in the Halt Cross, Opening Cross and
Closing Cross. In certain circumstances, a member may be assessed a
charge of $0.0015 per share executed for participation in the Opening
and Closing Crosses. Thus, the net benefit provided by the proposed
$0.0005 per share executed rebate is reasonable. The Exchange believes
that the proposed $0.0005 per share executed rebate is an equitable
allocation and is not unfairly discriminatory because the Exchange will
provide the rebate to all members that provide orders during a Trading
Pause in a LULD Liquidity Symbol that receive an execution
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. In terms of inter-market
competition, the Exchange notes that it operates in a highly
competitive market in which market participants can readily favor
competing venues if they deem fee levels at a particular venue to be
excessive, or rebate opportunities available at other venues to be more
favorable. In such an environment, the Exchange must continually adjust
its fees to remain competitive with other exchanges and with
alternative trading systems that have been exempted from compliance
with the statutory standards applicable to exchanges. Because
competitors are free to modify their own fees in response, and because
market participants may readily adjust their order routing practices,
the Exchange believes that the degree to which fee changes in this
market may impose any burden on competition is extremely limited.
In this instance, the Exchange is offering rebates in an effort to
improve market quality during times of high volatility. The Exchange
does not believe that the proposed change will place a burden on inter-
market competition because the Limit Up-Limit Down Pricing Program is
designed to improve market quality for all market participants by
promoting price discovery for LULD Liquidity Symbols that have
triggered Limit Up-Limit Down processes, and other exchanges are free
to offer similar programs. If successful, the proposed Limit Up-Limit
Down Pricing Program may promote competition among exchanges to provide
incentives of their own to address low liquidity in NMS Stocks during a
Limit Up-Limit Down process. Further, the Exchange does not believe
that the proposed incentive program imposes a burden on competition
among market participants because participation in the market during a
Limit Up-Limit Down Limit State, Straddle State, or Trading Pause is
completely voluntary. Moreover, the proposed incentive program will not
be a burden on competition among market participants because the
Exchange is offering a rebate to all members that qualify under the
program. The Exchange notes that it is limiting the $0.0010 per share
executed rebate to Exchange market makers registered in LULD Liquidity
Symbols as an incentive to such market makers to provide liquidity
priced better than they otherwise would be required to do so as market
makers. In addition, the proposal may incentivize market participants
to register as market makers with the Exchange. Providing incentive to
members to become market makers will benefit all market participants
trading in LULD Liquidity Symbols for the reasons discussed above. In
this regard, all member firms may register as market makers in the LULD
Liquidity Symbols if they choose to meet the qualification criteria.
Accordingly, the Exchange does not believe that the proposed changes
will impair the ability of members or competing order execution venues
to maintain their competitive standing in the financial markets.
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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\27\
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\27\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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
[[Page 30386]]
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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2016-065 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2016-065. 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-2016-065 and
should be submitted on or before June 6, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11411 Filed 5-13-16; 8:45 am]
BILLING CODE 8011-01-P
