Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt a New Extended Life Priority Order Attribute Under Rule 4703, and To Make Related Changes to Rules 4702, 4752, 4753, 4754, and 4757, 87628-87633 [2016-29116]
Download as PDF
<![CDATA[
87628
Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Notices
already in place on BOX’s electronic
book, as well as non-discriminatory
because they will uniformly apply to all
BOX Market Makers, both floor and
electronic.
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
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:
The Exchange does not believe that
the proposed rule changes will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that other exchanges
currently offer open-outcry floors. The
Exchange believes that the proposed
rules will allow the Exchange to
compete with these other exchanges.
Additionally, while the proposed rule
changes would permit BOX to operate a
Trading Floor, the Exchange is not
requiring that Participants register and
have a presence on the Trading Floor.
Therefore, the proposed rule changes do
not impose a burden on intra-market
competition.
Overall, the proposal is procompetitive for several reasons. In
particular, by helping Floor Brokers at
the Exchange compete for executions
against floor brokers at other exchanges,
it also helps them to be more efficient
and provide a better audit trail of their
executions on the Trading Floor. This,
in turn, helps the Exchange compete
against other exchanges in a deeply
competitive landscape. The Exchange
believes its proposed unique features for
open-outcry trading will provide value
to Floor Participants, which in turn, will
help the Exchange compete.178
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
sradovich on DSK3GMQ082PROD with NOTICES
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
178 Unique
features include proposed Rules
7600(h) and 8510(c)(1).
VerDate Sep<11>2014
19:12 Dec 02, 2016
Jkt 241001
IV. Solicitation of Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.179
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–29042 Filed 12–2–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79428; File No. SR–
NASDAQ–2016–161]
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–
BOX–2016–48 on the subject line.
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Proposed Rule Change To
Adopt a New Extended Life Priority
Order Attribute Under Rule 4703, and
To Make Related Changes to Rules
4702, 4752, 4753, 4754, and 4757
Paper Comments
November 30, 2016.
• 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–BOX–2016–48. 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 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–BOX–
2016–48 and should be submitted on or
before December 27, 2016.
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
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 November
17, 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 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 adopt a
new Extended Life Priority Order
Attribute under Rule 4703, and to make
related changes to Rules 4702, 4752,
4753, 4754, and 4757.
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
179 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\05DEN1.SGM
05DEN1
Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Notices
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 a new
Extended Life Priority Order Attribute,
which will allow Displayed Orders that
are committed to a one-second or longer
resting period to receive higher priority
than other Displayed Orders of the same
price on the Nasdaq Book. From its
inception, Nasdaq has been an
innovator and change agent in the
financial markets. Innovation is in
Nasdaq’s DNA, beginning with the
development of electronic trading and
continuing today as we seek to bring
new ideas to the financial markets, such
as streamlined proxy voting using
blockchain technology,3 strengthening
investor protection through Limit Order
Protection,4 and enhancing investor
confidence in the Opening Cross.5
Nasdaq has not shied away from
experimenting with new market
structure in an effort to further refine
our markets.6 The change proposed
herein is another step forward in a long
line of innovations Nasdaq has brought
to the U.S. financial markets.
sradovich on DSK3GMQ082PROD with NOTICES
Background
As the markets became more
automated in the 1990s and 2000s, and
in particular since the implementation
of the Regulation NMS Order Protection
Rule (Rule 611) and the Access Rule
(Rule 610) beginning in 2006,7
exchanges have generally based their
execution algorithms on a price/display/
time priority. Under this priority
structure, the first displayed order at a
price has priority over the next order
and so on (this is also sometimes
referred to as ‘‘First In First Out’’ or
3 See https://ir.nasdaq.com/
releasedetail.cfm?releaseid=954654; see also https://
www.pcworld.com/article/3033075/nasdaq-to-useblockchain-to-record-shareholder-votes.html.
4 See Securities Exchange Act Release No. 78246
[sic] (August 24, 2016), 81 FR 59672 (August 30,
2016) (SR–NASDAQ–2016–067).
5 See Securities Exchange Act Release No. 77235
(February 25, 2016), 81 FR 10935 (March 2, 2016)
(SR–NASDAQ–2015–159).
6 For example, in February 2015 Nasdaq
implemented an access fee pilot to determine the
effect of reduced access fees on market quality. See
Securities Exchange Act Release No. 73967
(December 30, 2014), 80 FR 594 (January 6, 2015)
(SR–NASDAQ–2014–128).
7 See Securities Exchange Act Release No. 53829
(May 18, 2006), 71 FR 30038 (May 24, 2006); see
also Securities Exchange Act Release No. 55160
(January 24, 2007), 72 FR 4202 (January 30, 2007).
VerDate Sep<11>2014
19:12 Dec 02, 2016
Jkt 241001
‘‘FIFO’’). All displayed orders have
priority over non-displayed orders at a
price level. The price/display/time
priority structure has brought with it
many benefits:
• Competition has increased
• Bid/Offer spreads have decreased
• Trading costs have decreased
• Access to the markets has been
democratized
Nonetheless, the price/display/time
priority system may not serve the
interests of all market participants. In
particular, the price/display/time
priority system provides incentives to
set new prices and optimize trading
strategies based on the time priority in
an order book. Increasing competition in
the price/time priority structure has led
to market velocity and displayed order
duration becoming widely discussed
and debated topics in recent years. Over
time, as order placement competition on
Nasdaq has grown, the importance of an
order’s ranking in the order queue has
increased. In addition, orders that
access resting liquidity on exchanges
have decreased in size due to the
fragmented nature of the broader market
and the adoption of algorithmic trading
and routing strategies. As a result, when
these smaller orders come to an
exchange to access liquidity in the most
liquid securities, there are orders deep
in the queue that may not always have
the opportunity to participate.
As an innovator, Nasdaq develops
new functionality to promote the
evolution of the markets. Nasdaq
believes that it is imperative to address
the needs of various market participants
in new ways. Specifically, Nasdaq is
proposing to supplement the ubiquitous
price/display/time priority structure in
the U.S. Equities markets to address the
needs of market participants that focus
their passive trading strategies on their
ability to assume market risk by resting
orders for an extended duration. Nasdaq
believes that many of these participants
have a longer investment horizon (i.e.,
long term investors) and therefore are
not necessarily monitoring minute
changes in the best bid and offer over
very short time periods and simply want
opportunities to participate passively at
the prevailing market when transactions
occur. Nasdaq has consulted a wide
swath of its market participants,
including buy-side institutions, market
makers, investment banks, and retail
broker-dealers. In addition, Nasdaq has
consulted with corporate issuers that
list their securities on Nasdaq. Nasdaq
has weighed various ideas on how to
expand interaction on Nasdaq’s order
book to more participants (e.g., long
term investors) and believes that it is
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
87629
better to provide incentives to reduce
the potential for order adjustment and
cancellation, rather than apply artificial
latency mechanisms that may distort or
have unintended consequences on
market quality. Specifically, Nasdaq is
proposing to provide an incentive to
market participants that enter orders
that are required to remain unaltered on
the Nasdaq Book for a minimum time.
Proposal
Nasdaq is proposing to offer a new
Order Attribute 8 that will allow certain
Displayed Orders 9 to have priority
ahead of other resting Displayed Orders
on the Nasdaq Book at the same price.
To receive this priority, an Order must
be designated with the Order Attribute
‘‘Extended Life Priority’’ (‘‘ELO’’) to
indicate that the Order will not be
altered or canceled by the member
before the minimum resting time has
elapsed.
Currently, Nasdaq’s System 10 places a
time-stamp on each Order entered by a
member, which determines the time
ranking of the Order for purposes of
processing the Order.11 The System
presents resting Orders on the Nasdaq
Book for execution against incoming
Orders in accordance with a price/
display/time algorithm.12 Price means
that better priced Orders will be
presented for execution first. For
example, an order to buy at $10.00
would be ranked before an order to buy
at $9.99. Display and Time mean that
equally priced Orders with a Display
8 The term ‘‘Order’’ means an instruction to trade
a specified number of shares in a specified System
Security submitted to the Nasdaq Market Center by
a Participant. See Rule 4701(e). An ‘‘Order Type’’
is a standardized set of instructions associated with
an Order that define how it will behave with
respect to pricing, execution, and/or posting to the
Nasdaq Book when submitted to Nasdaq. Id. An
‘‘Order Attribute’’ is a is a [sic] further set of
variable instructions that may be associated with an
Order to further define how it will behave with
respect to pricing, execution, and/or posting to the
Nasdaq Book when submitted to Nasdaq. Id. The
Exchange describes the Order Types available on
Nasdaq under Rule 4702 and describes the Order
Attributes available on Nasdaq under Rule 4703.
9 Display is an Order Attribute that allows the
price and size of an Order to be displayed to market
participants via market data feeds. All Orders that
are Attributable are also displayed, but an Order
may be displayed without being Attributable. As
discussed in Rule 4702, a Non-Displayed Order is
a specific Order Type, but other Order Types may
also be non-displayed if they are not assigned a
Display Order Attribute; however, depending on
context, all Orders that are not displayed may be
referred to as ‘‘Non-Displayed Orders.’’ An Order
with a Display Order Attribute may be referred to
as a ‘‘Displayed Order.’’ See Rule 4703(k).
10 As defined by Rule 4701(a).
11 See Rule 4756(a)(2).
12 See Rule 4757. The Exchange is proposing to
amend Rule 4757 to reflect the proposed exception
to the price/display/time algorithm, as discussed
below.
E:\FR\FM\05DEN1.SGM
05DEN1
sradovich on DSK3GMQ082PROD with NOTICES
87630
Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Notices
Attribute will be ranked in time priority.
Orders with a Non-Display Attribute,
including the Non-Displayed portion of
an Order with Reserve Size, are ranked
in time priority behind all Displayed
Orders.13 Processing Orders in this
manner rewards market participants
that take market risk by quickly and
efficiently submitting Displayed Orders
to the System to drive price formation
on the Nasdaq Book. Price/display/time
processing benefits the market by
driving competition in Order flow,
resulting in tighter bid/offer spreads and
reducing overall costs to buy and sell
securities. While this drive to reward
setting new price levels (i.e., being first
at a given price) has led to highly
efficient markets with significant
volume on Nasdaq being attributed to
firms that provide two-sided liquidity,
pure price/display/time processing may
limit certain customer segments from
effectively participating, particularly in
highly-liquid securities where the
sequence of the arrival of Orders is
important to participation in the
ensuing transactions on the Nasdaq
Book.
The Exchange has observed that many
of the market participants that have not
focused on efficient Order queue
placement of Displayed Order entry
often represent retail customer and
institutional Order flow, which tend to
have longer investment time horizons.
Nasdaq believes that promoting
Displayed Orders with longer time
horizons will enhance the market so
that it works for a wider array of market
participants, and will benefit publicly
traded companies by promoting longterm investment in corporate securities,
whether listed on Nasdaq or other
exchanges. To further this goal, the
Exchange is proposing an exception to
the general priority rules 14 to allow
Displayed Orders with an Extended Life
Priority Attribute to earn queue priority
on the Nasdaq Book at any given price
level ahead of all other Displayed
Orders without the Extended Life
Priority Attribute. As discussed below,
when there are multiple Orders with
Extended Life Priority resting on the
Nasdaq Book at the same price they
would be ranked by time, therefore
making the priority price/display/ELO/
time.
Another component to consider with
regards to the optimal priority structure
is the risk associated with submitting a
Displayed Order into the market. There
13 Non-Displayed Orders are not displayed in the
System, and have lower priority within the System
than an equally priced Displayed Order, regardless
of time stamp, and shall be executed pursuant to
Rule 4757. See Rule 4756(c)(3)(C).
14 Supra note 12.
VerDate Sep<11>2014
19:12 Dec 02, 2016
Jkt 241001
are various elements of risk that are
considered when a market participant
chooses a price and a time at which to
post a Displayed Order on the Nasdaq
Book. As noted earlier, price/display/
time priority does not necessarily
reward or recognize the various types of
risks associated with an Order. Nasdaq
believes that rewarding market
participants that enter Displayed Orders
and commit to a longer resting time on
the Nasdaq Book, would enable it to
broaden the types of behavior and
incentives provided, in particular in
securities in which the depth of the
Nasdaq Book may inhibit these Orders
from being placed on Nasdaq. As noted
above, these market participants are
typically considered long term
investors, representing retail and
institutional order flow.
In its initial implementation, Nasdaq
plans to support the Extended Life
Priority Attribute for Designated Retail
Orders.15 While the Extended Life
Priority Attribute may ultimately prove
to benefit a broader set of participants,
Nasdaq recognizes that any change of
this magnitude can be disruptive to its
membership and, consequently, it is
prudent to implement this concept in a
phased and measured manner.
Generally, retail investors are longer
term investors who measure stock
performance over hours, days, months,
etc. rather than seconds or milliseconds.
Nasdaq recognizes that there are other
market participants that are also long
term investors in the market, such as
institutional investors. To ensure that
these market participants’ needs are
addressed, Nasdaq anticipates that it
will extend the program to all Orders
that meet the requirements of the
15 A ‘‘Designated Retail Order’’ is an agency or
riskless principal order that meets the criteria of
FINRA Rule 5320.03 and that originates from a
natural person and is submitted to Nasdaq by a
member that designates it pursuant to this rule,
provided that no change is made to the terms of the
order with respect to price or side of market and
the order does not originate from a trading
algorithm or any other computerized methodology.
An order from a ‘‘natural person’’ can include
orders on behalf of accounts that are held in a
corporate legal form—such as an Individual
Retirement Account, Corporation, or a Limited
Liability Company—that has been established for
the benefit of an individual or group of related
family members, provided that the order is
submitted by an individual. Members must submit
a signed written attestation, in a form prescribed by
Nasdaq, that they have implemented policies and
procedures that are reasonably designed to ensure
that substantially all orders designated by the
member as ‘‘Designated Retail Orders’’ comply with
these requirements. Orders may be designated on an
order-by-order basis, or by designating all orders on
a particular order entry port as Designated Retail
Orders. See Rule 7018. The proposed change will
not affect how Orders entered by sponsored access
are treated for purposes of determining whether
they are Designated Retail Orders.
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
Extended Life Priority Attribute after its
successful implementation with
Designated Retail Orders. During the
initial retail phase, to be eligible to use
the Extended Life Priority Attribute, a
member must complete an attestation
provided by Nasdaq, stating that the
Designated Retail Orders it assigns an
Extended Life Priority Attribute will
meet the minimum performance
standards required by Nasdaq. Nasdaq
will determine from time to time what
the appropriate parameters are with
regards to how firms may qualify for the
Extended Life Attribute on Designated
Retail Orders. Initially, Nasdaq will
require that at least 99% of Designated
Retail Orders with the Extended Life
Priority Attribute exist unaltered on the
Nasdaq Book for a minimum of one
second.16 Nasdaq will require any
member that enters Designated Retail
Order with an Extended Life Priority
Attribute to attest that it will comply
with the minimum performance
standards required by Nasdaq under the
proposed new Rule 4703(m) to be
eligible to enter Designated Retail
Orders with an Extended Life Priority
Attribute.
Nasdaq will carefully monitor
members’ use of the Extended Life
Priority Attribute on a quarter-byquarter basis and will not rely solely on
a member’s attestation with regard to
Extended Life Priority usage. Nasdaq
will determine whether a member was
in compliance with the eligibility
requirements for a given quarter within
five business days of the end of that
quarter. Any member that has not met
the requirements in a quarter will be
ineligible to receive Extended Life
Priority treatment for its Orders in the
quarter immediately following the
quarter in which it did not comply.17
Following an ineligible quarter, a
member may once again participate in
the program if it completes a new
attestation for the following quarter. If a
member fails to meet the eligibility
standards a second time, its Orders will
not be eligible for Extended Life Priority
for the two quarters immediately
following the quarter in which it did not
meet the eligibility requirements for the
second time. If a member fails to meet
the eligibility standards for a third time,
it is no longer eligible to receive
Extended Life Priority for its Orders.
To implement the retail phase of the
Extended Life Priority Attribute, Nasdaq
is developing a unique identifier that
16 Note that executions would not be counted as
modifications.
17 The System will prevent a member that is not
eligible to participate in the program from entering
Orders that are flagged with Extended Life Priority
(including such designation on the port level).
E:\FR\FM\05DEN1.SGM
05DEN1
sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Notices
will be appended to each Order entered
by the member. Orders with the
Extended Life Priority Attribute may be
individually designated with the new
identifier or entered through an Order
port that has been set to designate, by
default, all Orders with the new
identifier. Orders marked with the new
identifier—whether on an order-byorder basis or via a designated port—
will be disseminated via Nasdaq’s
TotalView ITCH data feed.18 Thus,
market participants will be able to
identify Designated Retail Orders that
have the Extended Life Priority
Attribute.
As noted above, if an Order with
Extended Life Priority is not marketable
upon entry, the Order will post and
display at its limit price, and will be
ranked under the price/display/ELO/
time priority structure. In other words,
an Order with the Extended Life Priority
Attribute will be ranked ahead of other
Displayed Orders that do not have the
Extended Life Priority attribute and
behind any other Displayed Orders with
Extended Life Priority that were
received previously. For example, if five
members attest to enter Orders
designated with the Extended Life
Priority Attribute and each member
enters a Displayed Order so designated
at the same price, the Order entered first
will receive the highest priority among
the five, the second Order will be
ranked second, and so on; all Displayed
Orders entered at the same price and not
designated with the Extended Life
Priority Attribute will be ranked behind
the five Orders designated with the
Extended Life Priority Attribute.
There are three instances in which an
Order entered with the Extended Life
Priority Attribute will not gain ELO
priority. First, an Order with the
Extended Life Priority Attribute will
only have Extended Life Priority
ranking at its displayed price. If an
Order with the Extended Life Priority
Attribute is ranked at a Non-Displayed
price, it will be ranked without
Extended Life Priority among NonDisplayed Orders. For example, if a
Price to Comply Order 19 with an
Extended Life Priority Attribute to buy
at $11 would lock a Protected Offer of
$11, the Price to Comply Order will be
displayed at $10.99, but ranked at a
non-displayed price of $11 without
Extended Life Priority. If the Best Offer
changes to $11.01, the Price to Comply
18 See https://www.nasdaqtrader.com/
Trader.aspx?id=Totalview2 for a description of
TotalView ITCH.
19 See Rule 4702(b)(1).
VerDate Sep<11>2014
19:12 Dec 02, 2016
Jkt 241001
Order would be ranked and displayed at
$11 with Extended Life Priority.
Second, a Designated Retail Order
with a Non-Display Attribute that is also
entered with Extended Life Priority will
be added to the Nasdaq Book as a NonDisplay Order without Extended Life
Priority, following price/display/time
processing among resting Orders
without Extended Life Priority.
Third, while cross-specific Orders
marked with Extended Life Priority will
be eligible to participate in the Nasdaq
Opening,20 Closing 21 and Halt 22
Crosses, they will be ranked without
Extended Life Priority.23 Orders with
the Extended Life Priority Attribute that
are ranked on the Nasdaq Order Book
(i.e., orders that are in the continuous
market) will retain Extended Life
Priority if they are part of the Cross
execution.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,24 in general, and furthers the
objectives of Section 6(b)(5) of the Act,25
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.
Nasdaq believes that the proposed
change is consistent with this provision
of the Act because it is an attempt to
improve the quality of the market by
rewarding market participants for
longer-life Order flow. Importantly,
Nasdaq is not applying any
programmatic or intentional delay to
incoming Orders that are attempting to
access the market. Instead, Nasdaq’s
proposal seeks to provide an incentive
to market participants to improve the
market on Nasdaq by recognizing the
value of certain behaviors. Nasdaq
currently provides incentives in the
form of reduced fees and rebates in
return for market-improving behavior.
For example, Nasdaq’s NBBO Program
provides pricing incentives for
participants that, among other things,
establish the NBBO.26 With Extended
Life Priority, Nasdaq is providing
members an opportunity to gain priority
at any particular price level in return for
providing market-improving behavior in
20 See
Rule 4752.
Rule 4754.
22 See Rule 4753.
23 These are Orders that are designated to
participate in the Opening or Closing Cross, and are
not available for execution in continuous trading.
24 15 U.S.C. 78f(b).
25 15 U.S.C. 78f(b)(5).
26 See Rule 7014(g).
21 See
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
87631
the form of longer-lived displayed
quote. As discussed above, a great deal
of the liquidity that is provided on
exchanges is from market makers and
automated liquidity providers, who
have invested in technology and
efficiency, which has resulted in many
positive developments such as deep and
liquid markets. The proposed Extended
Life Priority Attribute has the potential
to attract a more diverse set of liquidity
providers with a longer term focus on
investing and trading.
Nasdaq believes that requiring
Designated Retail Orders to exist on the
Nasdaq Book unaltered for at least one
second is a meaningful time,
representing a significant level of risk
taken by the market participant in
return for the priority in the Nasdaq
Book. In addition, Nasdaq is initially
requiring members to attest that at least
99% of the Designated Retail Orders
submitted with Extended Life Priority
exist on the Nasdaq Book unaltered for
at least one second.27 As discussed
above, Nasdaq will review Orders from
members marked as Designated Retail
Orders with the Extended Life Priority
Attribute for compliance on a quarterly
basis. Eligibility for a given quarter will
be based on the previous quarter’s
analysis. Within five business days of
the end of a given quarter, Nasdaq will
determine whether a participant has met
the eligibility requirements. If a
member’s Orders do not qualify, it will
not be eligible for Extended Life Priority
for the quarter immediately following
the quarter in which it did not meet the
eligibility requirements. Following an
ineligible quarter a member may once
again participate in the program if it
completes a new attestation. If a
member is determined to have not met
the eligibility standards a second time,
it will not be eligible for Extended Life
Priority for the two quarters
immediately following the quarter in
which it did not meet the eligibility
requirements for the second time. If a
member is determined to have not met
the eligibility standards for a third time,
it is no longer eligible to participate in
the program. Thus, Nasdaq believes that
the attestation process coupled with
rigorous quarterly monitoring and
increasing periods of ineligibility for
repeated non-compliance with the
eligibility standards will serve to
dissuade any member from abusing the
attestation process, thereby protecting
investors and the public interest.28
27 Nasdaq will periodically assess the
effectiveness of the eligibility criteria, and make any
changes to the criteria through rulemaking.
28 Nasdaq notes that members entering Orders
with Extended Life Priority are subject to regulatory
E:\FR\FM\05DEN1.SGM
Continued
05DEN1
87632
Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
Nasdaq believes that, if successful, the
proposed change may bring greater
stability to the Displayed quote and
increase Displayed size on Nasdaq.
Thus, Nasdaq believes that the Extended
Life Priority Attribute is good for market
structure because it may provide
incentive to market participants that are
long-term investors and may diversify
Order interaction on Nasdaq, thereby
enhancing price discovery and market
resiliency.
Although the proposed change is
novel in U.S. equity markets, certain
U.S. options markets currently grant
preference in their order books for
customer orders.29 On the NASDAQ
PHLX options market, priority in the
order book is given to Orders entered for
a customer account over a controlled
account. A controlled account includes
any account controlled by or under
common control with a broker-dealer,
and customer accounts are all other
accounts.30 Moreover, the concept of
rewarding market participants that
provide Orders that live for a certain
minimum time is currently used in
Canada by the Toronto Stock Exchange.
Named the ‘‘Long Life’’ order type, it is
designed to enhance the quality of
execution for natural investors and their
dealers by rewarding those willing to
commit liquidity to the book for a
minimum period of time and by
enabling participants to gain priority in
return for a longer resting time.31 The
Exchange is proposing to initially limit
the proposed change to Designated
Retail Orders. Nasdaq believes that the
retail customers represented by such
Orders have the potential to
immediately and with minimal
technological effort, benefit from the
proposed change. Moreover, Nasdaq
believes that implementing the change
incrementally will reduce risk, ensure
that market participants are allowed
adequate time to adjust to the new
Order Attribute, and provide Nasdaq
with useful data with which it can
review and inspection, including a review of their
procedures and processes for compliance with
Extended Life Priority eligibility.
29 See, e.g., PHLX Rule 1014(g)(vii)(B) (providing
that quotations entered electronically by the
specialist, an RSQT or an SQT that do not cause an
order resting on the limit order book to become due
for execution may be matched at any time by
quotations entered electronically by the specialist
and/or other SQTs and RSQTs, and by ROT limit
orders and shall be deemed to be on parity, subject
to the requirement that orders of controlled
accounts must yield priority to customer orders as
set forth in Rule 1014(g)(i)(A)).
30 See PHLX Rule 1014(g)(i)(A).
31 See https://www.tmx.com/newsroom/pressreleases?id=352; see also https://www.osc.gov.on.ca/
documents/en/Marketplaces/xxr-tsx_20150818_
amd-rule-book-policies.pdf (Notice of Approval).
VerDate Sep<11>2014
19:12 Dec 02, 2016
Jkt 241001
further improve the proposed Order
Attribute.
For these reasons Nasdaq believes that
the proposed Extended Life Order
further perfects the mechanism of a free
and open market, promotes competition,
broadens participation in the market,
considers the cost/benefit of
implementation and provides market
participants with incentive to provide
market-improving Order flow.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Nasdaq 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. Rather, Nasdaq
believes that the proposed change
increases competition among market
participants because it allows certain
market participants to compete based on
elements other than the sequence of
order arrival. Specifically, the proposed
change will allow market participants
that have not invested in limit order
queue placement but rather take risk by
allowing an Order to rest on the Nasdaq
Book unchanged for a certain duration
to gain priority in the Nasdaq Book.
Although market participants that do
not submit Orders that qualify as
Extended Life Orders may lose priority
to Extended Life Orders on the Nasdaq
Book, any burden arising therefrom is
necessary to further refine the market to
serve a broader group of market
participants. In particular, Nasdaq
believes Extended Life Priority will
incentivize behavior from participants
that currently, may struggle to
participate and are willing to provide
market-improving Order flow, which
benefits all market participants.
Moreover, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily choose between competing
venues if they deem participation in
Nasdaq’s market is no longer desirable.
In such an environment, the Exchange
must carefully consider the impact that
any change it proposes may have on its
participants, understanding that it will
likely lose participants to the extent a
change is viewed as unfavorable by
them. Because competitors are free to
modify the incentives and structure of
their markets, the Exchange believes
that the degree to which modifying the
market structure of an individual market
may impose any burden on competition
is limited. Last, to the extent the
proposed change is successful in
attracting retail Order flow, Nasdaq also
believes that the proposed change will
promote competition among trading
venues by making Nasdaq a more
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
attractive trading venue for long-term
investors and therefore capital
formation.
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
such 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–2016–161 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–2016–161. 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
E:\FR\FM\05DEN1.SGM
05DEN1
87633
Federal Register / Vol. 81, No. 233 / Monday, December 5, 2016 / Notices
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–2016–161 and should be
submitted on or before December 27,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016–29116 Filed 12–2–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Submission for OMB Review;
Comment Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736.
sradovich on DSK3GMQ082PROD with NOTICES
Extension:
Rule 12h–1(f); SEC File No. 270–570; OMB
Control No. 3235–0632.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget this
request for extension of the previously
approved collection of information
discussed below.
Rule 12h–1(f) (17 CFR 240.12h–1(f))
under the Securities Exchange Act of
1934 (‘‘Exchange Act’’) provides an
exemption from the Exchange Act
Section 12(g) registration requirements
for compensatory employee stock
options of issuers that are not required
to file periodic reports under the
Exchange Act. The information required
under Exchange Act Rule 12h–1 is not
filed with the Commission. Exchange
Act Rule 12h–1(f) permits issuers to
provide the required information to the
option holders either by: (i) Physical or
electronic delivery of the information;
or (ii) written notice to the option
holders of the availability of the
information on a password-protected
Internet site. We estimate that it takes
approximately 2 burden hours per
response to prepare and provide the
information required under Rule 12h–
1(f) and it is prepared and provided by
approximately 40 respondents. We
estimate that 25% of the 2 hours per
response (0.5 hours per response) is
prepared by the company for a total
annual reporting burden of 20 hours (0.5
hours per response × 40 responses).
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
The public may view the background
documentation for this information
collection at the following Web site,
www.reginfo.gov. Comments should be
directed to: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to: Shagufta_
Ahmed@omb.eop.gov; and (ii) Pamela
Dyson, Director/Chief Information
Officer, Securities and Exchange
Commission, c/o Remi Pavlik-Simon,
100 F Street NE., Washington, DC 20549
or send an email to: PRA_Mailbox@
sec.gov. Comments must be submitted to
OMB within 30 days of this notice.
Dated: November 23, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–29088 Filed 12–2–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79425; File No. SR–Phlx–
2016–115]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change To Extend the
Penny Pilot Program
November 29, 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 November
16, 2016, NASDAQ PHLX LLC (‘‘Phlx’’
or ‘‘Exchange’’) filed with the Securities
1 15
32 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
19:12 Dec 02, 2016
2 17
Jkt 241001
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00104
Fmt 4703
Sfmt 4703
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Phlx Rule 1034 (Minimum Increments),3
to extend through June 30, 2017 or the
date of permanent approval, if earlier,
the Penny Pilot Program in options
classes in certain issues (‘‘Penny Pilot’’
or ‘‘Pilot’’), and to change the date when
delisted classes may be replaced in the
Penny Pilot.4
Proposed new language is italicized
and proposed deleted language is
[bracketed].
*
*
*
*
*
NASDAQ PHLX Rules
Options Rules
*
*
*
*
*
Rule 1034. Minimum Increments
(a) Except as provided in subparagraphs (i)(B) and (iii) below, all
options on stocks, index options, and
Exchange Traded Fund Shares quoting
in decimals at $3.00 or higher shall have
a minimum increment of $.10, and all
options on stocks and index options
quoting in decimals under $3.00 shall
have a minimum increment of $.05.
(i)(A) No Change.
(B) For a pilot period scheduled to
expire [December 31, 2016] June 30,
2017 or the date of permanent approval,
if earlier (the ‘‘pilot’’), certain options
shall be quoted and traded on the
Exchange in minimum increments of
$0.01 for all series in such options with
a price of less than $3.00, and in
minimum increments of $0.05 for all
series in such options with a price of
$3.00 or higher, except that options
overlying the PowerShares QQQ Trust
(‘‘QQQQ’’)®, SPDR S&P 500 Exchange
Traded Funds (‘‘SPY’’), and iShares
Russell 2000 Index Funds (‘‘IWM’’)
shall be quoted and traded in minimum
3 References herein to rules refer to rules of Phlx,
unless otherwise noted.
4 The Penny Pilot was established in January 2007
and was last extended in 2016. See Securities
Exchange Act Release Nos. 55153 (January 23,
2007), 72 FR 4553 (January 31, 2007) (SR–Phlx–
2006–74); 75286 (June 24, 2015), 80 FR 37333 (June
30, 2015) (SR–Phlx–2015–54) (notice of filing and
approval order establishing Penny Pilot); and 78060
(June 14, 2016), 81 FR 39979 (June 20, 2016) (SR–
Phlx–2016–47) (notice of filing and immediate
effectiveness extending the Penny Pilot through
December 31, 2016).
E:\FR\FM\05DEN1.SGM
05DEN1
]]>Agencies
[Federal Register Volume 81, Number 233 (Monday, December 5, 2016)]
[Notices]
[Pages 87628-87633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29116]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79428; File No. SR-NASDAQ-2016-161]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt a New Extended Life
Priority Order Attribute Under Rule 4703, and To Make Related Changes
to Rules 4702, 4752, 4753, 4754, and 4757
November 30, 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 November 17, 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 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.
---------------------------------------------------------------------------
\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 to adopt a new Extended Life Priority Order
Attribute under Rule 4703, and to make related changes to Rules 4702,
4752, 4753, 4754, and 4757.
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
[[Page 87629]]
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 a new Extended Life Priority Order
Attribute, which will allow Displayed Orders that are committed to a
one-second or longer resting period to receive higher priority than
other Displayed Orders of the same price on the Nasdaq Book. From its
inception, Nasdaq has been an innovator and change agent in the
financial markets. Innovation is in Nasdaq's DNA, beginning with the
development of electronic trading and continuing today as we seek to
bring new ideas to the financial markets, such as streamlined proxy
voting using blockchain technology,\3\ strengthening investor
protection through Limit Order Protection,\4\ and enhancing investor
confidence in the Opening Cross.\5\ Nasdaq has not shied away from
experimenting with new market structure in an effort to further refine
our markets.\6\ The change proposed herein is another step forward in a
long line of innovations Nasdaq has brought to the U.S. financial
markets.
---------------------------------------------------------------------------
\3\ See https://ir.nasdaq.com/releasedetail.cfm?releaseid=954654;
see also https://www.pcworld.com/article/3033075/nasdaq-to-use-blockchain-to-record-shareholder-votes.html.
\4\ See Securities Exchange Act Release No. 78246 [sic] (August
24, 2016), 81 FR 59672 (August 30, 2016) (SR-NASDAQ-2016-067).
\5\ See Securities Exchange Act Release No. 77235 (February 25,
2016), 81 FR 10935 (March 2, 2016) (SR-NASDAQ-2015-159).
\6\ For example, in February 2015 Nasdaq implemented an access
fee pilot to determine the effect of reduced access fees on market
quality. See Securities Exchange Act Release No. 73967 (December 30,
2014), 80 FR 594 (January 6, 2015) (SR-NASDAQ-2014-128).
---------------------------------------------------------------------------
Background
As the markets became more automated in the 1990s and 2000s, and in
particular since the implementation of the Regulation NMS Order
Protection Rule (Rule 611) and the Access Rule (Rule 610) beginning in
2006,\7\ exchanges have generally based their execution algorithms on a
price/display/time priority. Under this priority structure, the first
displayed order at a price has priority over the next order and so on
(this is also sometimes referred to as ``First In First Out'' or
``FIFO''). All displayed orders have priority over non-displayed orders
at a price level. The price/display/time priority structure has brought
with it many benefits:
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038 (May 24, 2006); see also Securities Exchange Act
Release No. 55160 (January 24, 2007), 72 FR 4202 (January 30, 2007).
Competition has increased
Bid/Offer spreads have decreased
Trading costs have decreased
Access to the markets has been democratized
Nonetheless, the price/display/time priority system may not serve
the interests of all market participants. In particular, the price/
display/time priority system provides incentives to set new prices and
optimize trading strategies based on the time priority in an order
book. Increasing competition in the price/time priority structure has
led to market velocity and displayed order duration becoming widely
discussed and debated topics in recent years. Over time, as order
placement competition on Nasdaq has grown, the importance of an order's
ranking in the order queue has increased. In addition, orders that
access resting liquidity on exchanges have decreased in size due to the
fragmented nature of the broader market and the adoption of algorithmic
trading and routing strategies. As a result, when these smaller orders
come to an exchange to access liquidity in the most liquid securities,
there are orders deep in the queue that may not always have the
opportunity to participate.
As an innovator, Nasdaq develops new functionality to promote the
evolution of the markets. Nasdaq believes that it is imperative to
address the needs of various market participants in new ways.
Specifically, Nasdaq is proposing to supplement the ubiquitous price/
display/time priority structure in the U.S. Equities markets to address
the needs of market participants that focus their passive trading
strategies on their ability to assume market risk by resting orders for
an extended duration. Nasdaq believes that many of these participants
have a longer investment horizon (i.e., long term investors) and
therefore are not necessarily monitoring minute changes in the best bid
and offer over very short time periods and simply want opportunities to
participate passively at the prevailing market when transactions occur.
Nasdaq has consulted a wide swath of its market participants, including
buy-side institutions, market makers, investment banks, and retail
broker-dealers. In addition, Nasdaq has consulted with corporate
issuers that list their securities on Nasdaq. Nasdaq has weighed
various ideas on how to expand interaction on Nasdaq's order book to
more participants (e.g., long term investors) and believes that it is
better to provide incentives to reduce the potential for order
adjustment and cancellation, rather than apply artificial latency
mechanisms that may distort or have unintended consequences on market
quality. Specifically, Nasdaq is proposing to provide an incentive to
market participants that enter orders that are required to remain
unaltered on the Nasdaq Book for a minimum time.
Proposal
Nasdaq is proposing to offer a new Order Attribute \8\ that will
allow certain Displayed Orders \9\ to have priority ahead of other
resting Displayed Orders on the Nasdaq Book at the same price. To
receive this priority, an Order must be designated with the Order
Attribute ``Extended Life Priority'' (``ELO'') to indicate that the
Order will not be altered or canceled by the member before the minimum
resting time has elapsed.
---------------------------------------------------------------------------
\8\ The term ``Order'' means an instruction to trade a specified
number of shares in a specified System Security submitted to the
Nasdaq Market Center by a Participant. See Rule 4701(e). An ``Order
Type'' is a standardized set of instructions associated with an
Order that define how it will behave with respect to pricing,
execution, and/or posting to the Nasdaq Book when submitted to
Nasdaq. Id. An ``Order Attribute'' is a is a [sic] further set of
variable instructions that may be associated with an Order to
further define how it will behave with respect to pricing,
execution, and/or posting to the Nasdaq Book when submitted to
Nasdaq. Id. The Exchange describes the Order Types available on
Nasdaq under Rule 4702 and describes the Order Attributes available
on Nasdaq under Rule 4703.
\9\ Display is an Order Attribute that allows the price and size
of an Order to be displayed to market participants via market data
feeds. All Orders that are Attributable are also displayed, but an
Order may be displayed without being Attributable. As discussed in
Rule 4702, a Non-Displayed Order is a specific Order Type, but other
Order Types may also be non-displayed if they are not assigned a
Display Order Attribute; however, depending on context, all Orders
that are not displayed may be referred to as ``Non-Displayed
Orders.'' An Order with a Display Order Attribute may be referred to
as a ``Displayed Order.'' See Rule 4703(k).
---------------------------------------------------------------------------
Currently, Nasdaq's System \10\ places a time-stamp on each Order
entered by a member, which determines the time ranking of the Order for
purposes of processing the Order.\11\ The System presents resting
Orders on the Nasdaq Book for execution against incoming Orders in
accordance with a price/display/time algorithm.\12\ Price means that
better priced Orders will be presented for execution first. For
example, an order to buy at $10.00 would be ranked before an order to
buy at $9.99. Display and Time mean that equally priced Orders with a
Display
[[Page 87630]]
Attribute will be ranked in time priority. Orders with a Non-Display
Attribute, including the Non-Displayed portion of an Order with Reserve
Size, are ranked in time priority behind all Displayed Orders.\13\
Processing Orders in this manner rewards market participants that take
market risk by quickly and efficiently submitting Displayed Orders to
the System to drive price formation on the Nasdaq Book. Price/display/
time processing benefits the market by driving competition in Order
flow, resulting in tighter bid/offer spreads and reducing overall costs
to buy and sell securities. While this drive to reward setting new
price levels (i.e., being first at a given price) has led to highly
efficient markets with significant volume on Nasdaq being attributed to
firms that provide two-sided liquidity, pure price/display/time
processing may limit certain customer segments from effectively
participating, particularly in highly-liquid securities where the
sequence of the arrival of Orders is important to participation in the
ensuing transactions on the Nasdaq Book.
---------------------------------------------------------------------------
\10\ As defined by Rule 4701(a).
\11\ See Rule 4756(a)(2).
\12\ See Rule 4757. The Exchange is proposing to amend Rule 4757
to reflect the proposed exception to the price/display/time
algorithm, as discussed below.
\13\ Non-Displayed Orders are not displayed in the System, and
have lower priority within the System than an equally priced
Displayed Order, regardless of time stamp, and shall be executed
pursuant to Rule 4757. See Rule 4756(c)(3)(C).
---------------------------------------------------------------------------
The Exchange has observed that many of the market participants that
have not focused on efficient Order queue placement of Displayed Order
entry often represent retail customer and institutional Order flow,
which tend to have longer investment time horizons. Nasdaq believes
that promoting Displayed Orders with longer time horizons will enhance
the market so that it works for a wider array of market participants,
and will benefit publicly traded companies by promoting long-term
investment in corporate securities, whether listed on Nasdaq or other
exchanges. To further this goal, the Exchange is proposing an exception
to the general priority rules \14\ to allow Displayed Orders with an
Extended Life Priority Attribute to earn queue priority on the Nasdaq
Book at any given price level ahead of all other Displayed Orders
without the Extended Life Priority Attribute. As discussed below, when
there are multiple Orders with Extended Life Priority resting on the
Nasdaq Book at the same price they would be ranked by time, therefore
making the priority price/display/ELO/time.
---------------------------------------------------------------------------
\14\ Supra note 12.
---------------------------------------------------------------------------
Another component to consider with regards to the optimal priority
structure is the risk associated with submitting a Displayed Order into
the market. There are various elements of risk that are considered when
a market participant chooses a price and a time at which to post a
Displayed Order on the Nasdaq Book. As noted earlier, price/display/
time priority does not necessarily reward or recognize the various
types of risks associated with an Order. Nasdaq believes that rewarding
market participants that enter Displayed Orders and commit to a longer
resting time on the Nasdaq Book, would enable it to broaden the types
of behavior and incentives provided, in particular in securities in
which the depth of the Nasdaq Book may inhibit these Orders from being
placed on Nasdaq. As noted above, these market participants are
typically considered long term investors, representing retail and
institutional order flow.
In its initial implementation, Nasdaq plans to support the Extended
Life Priority Attribute for Designated Retail Orders.\15\ While the
Extended Life Priority Attribute may ultimately prove to benefit a
broader set of participants, Nasdaq recognizes that any change of this
magnitude can be disruptive to its membership and, consequently, it is
prudent to implement this concept in a phased and measured manner.
Generally, retail investors are longer term investors who measure stock
performance over hours, days, months, etc. rather than seconds or
milliseconds. Nasdaq recognizes that there are other market
participants that are also long term investors in the market, such as
institutional investors. To ensure that these market participants'
needs are addressed, Nasdaq anticipates that it will extend the program
to all Orders that meet the requirements of the Extended Life Priority
Attribute after its successful implementation with Designated Retail
Orders. During the initial retail phase, to be eligible to use the
Extended Life Priority Attribute, a member must complete an attestation
provided by Nasdaq, stating that the Designated Retail Orders it
assigns an Extended Life Priority Attribute will meet the minimum
performance standards required by Nasdaq. Nasdaq will determine from
time to time what the appropriate parameters are with regards to how
firms may qualify for the Extended Life Attribute on Designated Retail
Orders. Initially, Nasdaq will require that at least 99% of Designated
Retail Orders with the Extended Life Priority Attribute exist unaltered
on the Nasdaq Book for a minimum of one second.\16\ Nasdaq will require
any member that enters Designated Retail Order with an Extended Life
Priority Attribute to attest that it will comply with the minimum
performance standards required by Nasdaq under the proposed new Rule
4703(m) to be eligible to enter Designated Retail Orders with an
Extended Life Priority Attribute.
---------------------------------------------------------------------------
\15\ A ``Designated Retail Order'' is an agency or riskless
principal order that meets the criteria of FINRA Rule 5320.03 and
that originates from a natural person and is submitted to Nasdaq by
a member that designates it pursuant to this rule, provided that no
change is made to the terms of the order with respect to price or
side of market and the order does not originate from a trading
algorithm or any other computerized methodology. An order from a
``natural person'' can include orders on behalf of accounts that are
held in a corporate legal form--such as an Individual Retirement
Account, Corporation, or a Limited Liability Company--that has been
established for the benefit of an individual or group of related
family members, provided that the order is submitted by an
individual. Members must submit a signed written attestation, in a
form prescribed by Nasdaq, that they have implemented policies and
procedures that are reasonably designed to ensure that substantially
all orders designated by the member as ``Designated Retail Orders''
comply with these requirements. Orders may be designated on an
order-by-order basis, or by designating all orders on a particular
order entry port as Designated Retail Orders. See Rule 7018. The
proposed change will not affect how Orders entered by sponsored
access are treated for purposes of determining whether they are
Designated Retail Orders.
\16\ Note that executions would not be counted as modifications.
---------------------------------------------------------------------------
Nasdaq will carefully monitor members' use of the Extended Life
Priority Attribute on a quarter-by-quarter basis and will not rely
solely on a member's attestation with regard to Extended Life Priority
usage. Nasdaq will determine whether a member was in compliance with
the eligibility requirements for a given quarter within five business
days of the end of that quarter. Any member that has not met the
requirements in a quarter will be ineligible to receive Extended Life
Priority treatment for its Orders in the quarter immediately following
the quarter in which it did not comply.\17\ Following an ineligible
quarter, a member may once again participate in the program if it
completes a new attestation for the following quarter. If a member
fails to meet the eligibility standards a second time, its Orders will
not be eligible for Extended Life Priority for the two quarters
immediately following the quarter in which it did not meet the
eligibility requirements for the second time. If a member fails to meet
the eligibility standards for a third time, it is no longer eligible to
receive Extended Life Priority for its Orders.
---------------------------------------------------------------------------
\17\ The System will prevent a member that is not eligible to
participate in the program from entering Orders that are flagged
with Extended Life Priority (including such designation on the port
level).
---------------------------------------------------------------------------
To implement the retail phase of the Extended Life Priority
Attribute, Nasdaq is developing a unique identifier that
[[Page 87631]]
will be appended to each Order entered by the member. Orders with the
Extended Life Priority Attribute may be individually designated with
the new identifier or entered through an Order port that has been set
to designate, by default, all Orders with the new identifier. Orders
marked with the new identifier--whether on an order-by-order basis or
via a designated port--will be disseminated via Nasdaq's TotalView ITCH
data feed.\18\ Thus, market participants will be able to identify
Designated Retail Orders that have the Extended Life Priority
Attribute.
---------------------------------------------------------------------------
\18\ See https://www.nasdaqtrader.com/Trader.aspx?id=Totalview2
for a description of TotalView ITCH.
---------------------------------------------------------------------------
As noted above, if an Order with Extended Life Priority is not
marketable upon entry, the Order will post and display at its limit
price, and will be ranked under the price/display/ELO/time priority
structure. In other words, an Order with the Extended Life Priority
Attribute will be ranked ahead of other Displayed Orders that do not
have the Extended Life Priority attribute and behind any other
Displayed Orders with Extended Life Priority that were received
previously. For example, if five members attest to enter Orders
designated with the Extended Life Priority Attribute and each member
enters a Displayed Order so designated at the same price, the Order
entered first will receive the highest priority among the five, the
second Order will be ranked second, and so on; all Displayed Orders
entered at the same price and not designated with the Extended Life
Priority Attribute will be ranked behind the five Orders designated
with the Extended Life Priority Attribute.
There are three instances in which an Order entered with the
Extended Life Priority Attribute will not gain ELO priority. First, an
Order with the Extended Life Priority Attribute will only have Extended
Life Priority ranking at its displayed price. If an Order with the
Extended Life Priority Attribute is ranked at a Non-Displayed price, it
will be ranked without Extended Life Priority among Non-Displayed
Orders. For example, if a Price to Comply Order \19\ with an Extended
Life Priority Attribute to buy at $11 would lock a Protected Offer of
$11, the Price to Comply Order will be displayed at $10.99, but ranked
at a non-displayed price of $11 without Extended Life Priority. If the
Best Offer changes to $11.01, the Price to Comply Order would be ranked
and displayed at $11 with Extended Life Priority.
---------------------------------------------------------------------------
\19\ See Rule 4702(b)(1).
---------------------------------------------------------------------------
Second, a Designated Retail Order with a Non-Display Attribute that
is also entered with Extended Life Priority will be added to the Nasdaq
Book as a Non-Display Order without Extended Life Priority, following
price/display/time processing among resting Orders without Extended
Life Priority.
Third, while cross-specific Orders marked with Extended Life
Priority will be eligible to participate in the Nasdaq Opening,\20\
Closing \21\ and Halt \22\ Crosses, they will be ranked without
Extended Life Priority.\23\ Orders with the Extended Life Priority
Attribute that are ranked on the Nasdaq Order Book (i.e., orders that
are in the continuous market) will retain Extended Life Priority if
they are part of the Cross execution.
---------------------------------------------------------------------------
\20\ See Rule 4752.
\21\ See Rule 4754.
\22\ See Rule 4753.
\23\ These are Orders that are designated to participate in the
Opening or Closing Cross, and are not available for execution in
continuous trading.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\24\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\25\ 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. Nasdaq believes that the proposed change is consistent with
this provision of the Act because it is an attempt to improve the
quality of the market by rewarding market participants for longer-life
Order flow. Importantly, Nasdaq is not applying any programmatic or
intentional delay to incoming Orders that are attempting to access the
market. Instead, Nasdaq's proposal seeks to provide an incentive to
market participants to improve the market on Nasdaq by recognizing the
value of certain behaviors. Nasdaq currently provides incentives in the
form of reduced fees and rebates in return for market-improving
behavior. For example, Nasdaq's NBBO Program provides pricing
incentives for participants that, among other things, establish the
NBBO.\26\ With Extended Life Priority, Nasdaq is providing members an
opportunity to gain priority at any particular price level in return
for providing market-improving behavior in the form of longer-lived
displayed quote. As discussed above, a great deal of the liquidity that
is provided on exchanges is from market makers and automated liquidity
providers, who have invested in technology and efficiency, which has
resulted in many positive developments such as deep and liquid markets.
The proposed Extended Life Priority Attribute has the potential to
attract a more diverse set of liquidity providers with a longer term
focus on investing and trading.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ See Rule 7014(g).
---------------------------------------------------------------------------
Nasdaq believes that requiring Designated Retail Orders to exist on
the Nasdaq Book unaltered for at least one second is a meaningful time,
representing a significant level of risk taken by the market
participant in return for the priority in the Nasdaq Book. In addition,
Nasdaq is initially requiring members to attest that at least 99% of
the Designated Retail Orders submitted with Extended Life Priority
exist on the Nasdaq Book unaltered for at least one second.\27\ As
discussed above, Nasdaq will review Orders from members marked as
Designated Retail Orders with the Extended Life Priority Attribute for
compliance on a quarterly basis. Eligibility for a given quarter will
be based on the previous quarter's analysis. Within five business days
of the end of a given quarter, Nasdaq will determine whether a
participant has met the eligibility requirements. If a member's Orders
do not qualify, it will not be eligible for Extended Life Priority for
the quarter immediately following the quarter in which it did not meet
the eligibility requirements. Following an ineligible quarter a member
may once again participate in the program if it completes a new
attestation. If a member is determined to have not met the eligibility
standards a second time, it will not be eligible for Extended Life
Priority for the two quarters immediately following the quarter in
which it did not meet the eligibility requirements for the second time.
If a member is determined to have not met the eligibility standards for
a third time, it is no longer eligible to participate in the program.
Thus, Nasdaq believes that the attestation process coupled with
rigorous quarterly monitoring and increasing periods of ineligibility
for repeated non-compliance with the eligibility standards will serve
to dissuade any member from abusing the attestation process, thereby
protecting investors and the public interest.\28\
---------------------------------------------------------------------------
\27\ Nasdaq will periodically assess the effectiveness of the
eligibility criteria, and make any changes to the criteria through
rulemaking.
\28\ Nasdaq notes that members entering Orders with Extended
Life Priority are subject to regulatory review and inspection,
including a review of their procedures and processes for compliance
with Extended Life Priority eligibility.
---------------------------------------------------------------------------
[[Page 87632]]
Nasdaq believes that, if successful, the proposed change may bring
greater stability to the Displayed quote and increase Displayed size on
Nasdaq. Thus, Nasdaq believes that the Extended Life Priority Attribute
is good for market structure because it may provide incentive to market
participants that are long-term investors and may diversify Order
interaction on Nasdaq, thereby enhancing price discovery and market
resiliency.
Although the proposed change is novel in U.S. equity markets,
certain U.S. options markets currently grant preference in their order
books for customer orders.\29\ On the NASDAQ PHLX options market,
priority in the order book is given to Orders entered for a customer
account over a controlled account. A controlled account includes any
account controlled by or under common control with a broker-dealer, and
customer accounts are all other accounts.\30\ Moreover, the concept of
rewarding market participants that provide Orders that live for a
certain minimum time is currently used in Canada by the Toronto Stock
Exchange. Named the ``Long Life'' order type, it is designed to enhance
the quality of execution for natural investors and their dealers by
rewarding those willing to commit liquidity to the book for a minimum
period of time and by enabling participants to gain priority in return
for a longer resting time.\31\ The Exchange is proposing to initially
limit the proposed change to Designated Retail Orders. Nasdaq believes
that the retail customers represented by such Orders have the potential
to immediately and with minimal technological effort, benefit from the
proposed change. Moreover, Nasdaq believes that implementing the change
incrementally will reduce risk, ensure that market participants are
allowed adequate time to adjust to the new Order Attribute, and provide
Nasdaq with useful data with which it can further improve the proposed
Order Attribute.
---------------------------------------------------------------------------
\29\ See, e.g., PHLX Rule 1014(g)(vii)(B) (providing that
quotations entered electronically by the specialist, an RSQT or an
SQT that do not cause an order resting on the limit order book to
become due for execution may be matched at any time by quotations
entered electronically by the specialist and/or other SQTs and
RSQTs, and by ROT limit orders and shall be deemed to be on parity,
subject to the requirement that orders of controlled accounts must
yield priority to customer orders as set forth in Rule
1014(g)(i)(A)).
\30\ See PHLX Rule 1014(g)(i)(A).
\31\ See https://www.tmx.com/newsroom/press-releases?id=352; see
also https://www.osc.gov.on.ca/documents/en/Marketplaces/xxr-tsx_20150818_amd-rule-book-policies.pdf (Notice of Approval).
---------------------------------------------------------------------------
For these reasons Nasdaq believes that the proposed Extended Life
Order further perfects the mechanism of a free and open market,
promotes competition, broadens participation in the market, considers
the cost/benefit of implementation and provides market participants
with incentive to provide market-improving Order flow.
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq 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. Rather, Nasdaq believes that the proposed
change increases competition among market participants because it
allows certain market participants to compete based on elements other
than the sequence of order arrival. Specifically, the proposed change
will allow market participants that have not invested in limit order
queue placement but rather take risk by allowing an Order to rest on
the Nasdaq Book unchanged for a certain duration to gain priority in
the Nasdaq Book. Although market participants that do not submit Orders
that qualify as Extended Life Orders may lose priority to Extended Life
Orders on the Nasdaq Book, any burden arising therefrom is necessary to
further refine the market to serve a broader group of market
participants. In particular, Nasdaq believes Extended Life Priority
will incentivize behavior from participants that currently, may
struggle to participate and are willing to provide market-improving
Order flow, which benefits all market participants. Moreover, the
Exchange notes that it operates in a highly competitive market in which
market participants can readily choose between competing venues if they
deem participation in Nasdaq's market is no longer desirable. In such
an environment, the Exchange must carefully consider the impact that
any change it proposes may have on its participants, understanding that
it will likely lose participants to the extent a change is viewed as
unfavorable by them. Because competitors are free to modify the
incentives and structure of their markets, the Exchange believes that
the degree to which modifying the market structure of an individual
market may impose any burden on competition is limited. Last, to the
extent the proposed change is successful in attracting retail Order
flow, Nasdaq also believes that the proposed change will promote
competition among trading venues by making Nasdaq a more attractive
trading venue for long-term investors and therefore capital formation.
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 such 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-2016-161 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-2016-161. 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
[[Page 87633]]
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-2016-161 and should
be submitted on or before December 27, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
---------------------------------------------------------------------------
\32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29116 Filed 12-2-16; 8:45 am]
BILLING CODE 8011-01-P
