Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt the Midpoint Extended Life Order, 37248-37253 [2017-16743]
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Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices
where the purchase or redemption will
include cash under the limited
circumstances specified in the
application, purchasers will be required
to purchase Creation Units by
depositing specified instruments
(‘‘Deposit Instruments’’), and
shareholders redeeming their shares
will receive specified instruments
(‘‘Redemption Instruments’’). The
Deposit Instruments and the
Redemption Instruments will each
correspond pro rata to the positions in
the Fund’s portfolio (including cash
positions) except as specified in the
application.
4. Because shares will not be
individually redeemable, applicants
request an exemption from section
5(a)(1) and section 2(a)(32) of the Act
that would permit the Funds to register
as open-end management investment
companies and issue shares that are
redeemable in Creation Units only.
5. Applicants also request an
exemption from section 22(d) of the Act
and rule 22c–1 under the Act as
secondary market trading in shares will
take place at negotiated prices, not at a
current offering price described in a
Fund’s prospectus, and not at a price
based on NAV. Applicants state that (a)
secondary market trading in shares does
not involve a Fund as a party and will
not result in dilution of an investment
in shares, and (b) to the extent different
prices exist during a given trading day,
or from day to day, such variances occur
as a result of third-party market forces,
such as supply and demand. Therefore,
applicants assert that secondary market
transactions in shares will not lead to
discrimination or preferential treatment
among purchasers. Finally, applicants
represent that share market prices will
be disciplined by arbitrage
opportunities, which should prevent
shares from trading at a material
discount or premium from NAV.
6. With respect to Funds that effect
creations and redemptions of Creation
Units in kind and that are based on
certain Underlying Indexes that include
foreign securities, applicants request
relief from the requirement imposed by
section 22(e) in order to allow such
Funds to pay redemption proceeds
within fifteen calendar days following
the tender of Creation Units for
redemption. Applicants assert that the
requested relief would not be
inconsistent with the spirit and intent of
section 22(e) to prevent unreasonable,
undisclosed or unforeseen delays in the
actual payment of redemption proceeds.
7. Applicants request an exemption to
permit Funds of Funds to acquire Fund
shares beyond the limits of section
12(d)(1)(A) of the Act; and the Funds,
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and any principal underwriter for the
Funds, and/or any broker or dealer
registered under the Exchange Act, to
sell shares to Funds of Funds beyond
the limits of section 12(d)(1)(B) of the
Act. The application’s terms and
conditions are designed to, among other
things, help prevent any potential (i)
undue influence over a Fund through
control or voting power, or in
connection with certain services,
transactions, and underwritings, (ii)
excessive layering of fees, and (iii)
overly complex fund structures, which
are the concerns underlying the limits
in sections 12(d)(1)(A) and (B) of the
Act.
8. Applicants request an exemption
from sections 17(a)(1) and 17(a)(2) of the
Act to permit persons that are Affiliated
Persons, or Second Tier Affiliates, of the
Funds, solely by virtue of certain
ownership interests, to effectuate
purchases and redemptions in-kind. The
deposit procedures for in-kind
purchases of Creation Units and the
redemption procedures for in-kind
redemptions of Creation Units will be
the same for all purchases and
redemptions and Deposit Instruments
and Redemption Instruments will be
valued in the same manner as those
investment positions currently held by
the Funds. Applicants also seek relief
from the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its
shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.3
The purchase of Creation Units by a
Fund of Funds directly from a Fund will
be accomplished in accordance with the
policies of the Fund of Funds and will
be based on the NAVs of the Funds.
9. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
3 The requested relief would apply to direct sales
of shares in Creation Units by a Fund to a Fund of
Funds and redemptions of those shares. Applicants,
moreover, are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Fund could be deemed an
Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Fund of Funds.
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exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16795 Filed 8–8–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81311; File No. SR–
NASDAQ–2017–074]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change To
Adopt the Midpoint Extended Life
Order
August 3, 2017.
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 July 21,
2017, 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 the
Midpoint Extended Life Order.
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.
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
sradovich on DSK3GMQ082PROD with NOTICES
1. Purpose
The U.S. equities markets are the envy
of the world because they are singularly
effective at attracting and allocating
capital to innovative companies that
create millions of jobs and trillions of
dollars of shareholder value, companies
like Apple, Google, Facebook, Amazon,
Cisco Systems, Gilead, and thousands of
other Nasdaq issuers. As the listing
venue and the steward of the market on
which they are listed, Nasdaq is
compelled to make innovative changes
to better the quality of the market, to the
benefit of issuers and the people that
invest in issuers’ securities.
As discussed in detail below, Nasdaq
is proposing to adopt the Midpoint
Extended Life Order as a new Order
Type 3 available to all members, and by
extension to their customers, which will
reward market participants that commit
to a minimum half-second period
(‘‘Holding Period’’), during which their
order remains unchanged. Midpoint
Extended Life Orders provide a
mechanism by which market
participants may receive a midpoint
3 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. 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. An ‘‘Order Attribute’’ is a
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. The available Order Types and Order
Attributes, and the Order Attributes that may be
associated with particular Order Types, are
described in Rules 4702 and 4703. One or more
Order Attributes may be assigned to a single Order;
provided, however, that if the use of multiple Order
Attributes would provide contradictory instructions
to an Order, the System will reject the Order or
remove non-conforming Order Attributes. See Rule
4701(e).
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execution with other Midpoint
Extended Life Orders that have also met
the same Holding Period requirement.
Like Nasdaq’s Extended Life Order
Attribute,4 Nasdaq is continuing its
drive to provide innovative solutions to
increase participation on the market by
a broader array of investors. Nasdaq
proposed the Extended Life Order
Attribute as a first step in broadening
participation on the market by
providing priority to retail orders that
often have longer term investment
horizons. The Extended Life Order
Attribute provides retail market
participants a mechanism by which they
have more opportunity to participate
effectively at the prevailing market price
when transactions occur. Nasdaq is now
proposing a new Order Type that will
allow all market participants to more
effectively execute longer term
investment strategies—the Midpoint
Extended Life Order.
Background
The Exchange operates based on a
price/display/time priority execution
algorithm.5 Simply put, 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. Midpoint Orders
are non-displayed 6 and allow
participants to receive price
improvement by executing against other
non-displayed liquidity at the midpoint
of the National Best Bid and Offer
(‘‘NBBO’’). Nasdaq believes that some
market participants that are looking for
executions at the midpoint often have a
longer investment horizon (i.e., long
term investors), many of which are
seeking both the best execution possible
at the midpoint of the NBBO and are not
necessarily measuring execution quality
solely by each tick by tick change in
market price. Some of these market
participants with large-sized Orders are
seeking to gain such an execution while
minimizing market impact.
Over time, as order placement
competition on Nasdaq has grown, the
time that it takes for market participants
to react to changes in the markets has
4 See Securities Exchange Act Release No. 81097
(July 7, 2017), 82 FR 32386 (July 13, 2017) (SR–
NASDAQ–2016–161).
5 See Rule 4757.
6 Display is an Order Attribute that allows the
price and size of an Order to be displayed to market
participants via market data feeds. Certain Order
Types may be non-displayed if they are not
assigned a Display Order Attribute, and all nondisplayed Orders may be referred to as ‘‘NonDisplayed Orders.’’ In contrast, an Order with a
Display Order Attribute may be referred to as a
‘‘Displayed Order.’’ See Rule 4703(k).
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decreased significantly. 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. As a result of this decrease in
reaction time and size of orders, Nasdaq,
and the equities markets in general,
have become incredibly efficient. The
nature of today’s equities markets,
however, have made it difficult for
certain market participants that have
longer term investment horizons and
that focus on minimizing market impact
rather than optimizing for queue
placement. This is particularly true for
market participants that are attempting
to trade large-sized Orders.7
Nasdaq weighed various ideas on how
to augment the interaction on Nasdaq to
meet the needs of these underserved
market participants. Nasdaq believes
that it is better to provide incentives
that protect midpoint Orders by
improving execution quality without
impacting the ability to manage risk and
to reduce the potential for order
adjustment and cancellation, rather than
apply blanket artificial latency
mechanisms that apply to all Orders,
which may distort or have unintended
consequences on market quality such as
disadvantaging displayed Orders.
Nasdaq is proposing to address the
needs of market participants that focus
their trading on receiving midpoint
execution where time to execution is
less important when working to meet
their long term investment needs. As
discussed in detail below, Nasdaq is
proposing to provide the Midpoint
Extended Life Order as a voluntary
option by which these market
participants may participate on Nasdaq
in return for allowing their orders to
exist unchanged for a certain time.
Proposal
The Exchange is proposing to adopt a
new Order Type that will allow all
market participants that are less
concerned with time to execution to
receive executions at the midpoint of
the NBBO, while deemphasizing speed
as a factor in achieving the execution.
Specifically, the Midpoint Extended
Life Order is an Order Type with a Non7 Nasdaq notes that market participants with
large-sized Orders and that are not necessarily
monitoring small changes in the NBBO or time to
execution, include ‘‘Institutional’’ investors.
Institutional investors are generally characterized as
large entities that make investments on behalf of
their owners or investors, such as pension funds
and mutual funds. Nonetheless, Nasdaq believes
that Midpoint Extended Life Orders will provide
benefit to a wide array of market participants. As
noted above, Midpoint Extended Life Orders are
available to all Nasdaq members.
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Display Order Attribute 8 that is priced
at the midpoint between the NBBO and
that will not be eligible to execute until
the Holding Period of one half of a
second has passed after acceptance of
the Order by the System.9 The Holding
Period represents a level of market risk
that the market participant has assumed
in order to receive a midpoint execution
with other Midpoint Extended Life
Orders, which have also met the
Holding Period requirement. Moreover,
the Holding Period mitigates risk that a
market participant may attempt to
access other Midpoint Extended Life
Orders just prior to a move in the
NBBO, thereby potentially negatively
affecting the price at which the contraside Midpoint Extended Life Order
would receive. In order to allow
members to effectively manage risk, a
Midpoint Extended Life Order may be
cancelled at any time.
Once a Midpoint Extended Life Order
becomes eligible to execute by existing
unchanged for the Holding Period, the
Order may only execute against other
eligible Midpoint Extended Life Orders.
Like other midpoint pegged Orders,10
once the Midpoint Extended Life Order
is eligible, a buy (sell) Midpoint
Extended Life Order will be ranked in
time order at the midpoint among other
buy (sell) Midpoint Extended Life
Orders. As discussed above, limiting
interaction of Midpoint Extended Life
Orders to other Midpoint Extended Life
Orders mitigates the impact that these
orders will have on the market and
allows market participants entering
such orders an increased chance of
receiving a full execution at the
midpoint of the NBBO at a given time.
Importantly, limiting interaction of
Midpoint Extended Life Orders ensures
fairness because all Midpoint Extended
Life Orders have met the same Holding
Period requirement, thereby ensuring
that members with Midpoint Extended
Life Order are not disadvantaged by
non-Midpoint Extended Life Orders
entered by participant that have the
benefit of knowing, and reacting to, the
current state of the market.
A Midpoint Extended Life Order may
be assigned a limit price. A limit price
restricts the price at which an order may
execute such that an order to sell may
not execute below a certain price and an
order to buy may not execute above a
certain price. If a market participant
assigns a limit price to its Midpoint
8 See
note 6, supra.
noted above, a Midpoint Extended Life Order
must remained [sic] unchanged for the Holding
Period. If a Midpoint Extended Life Order is
modified by a member during the Holding Period,
the System will restart the Holding Period.
10 See also Rule 4703(d).
9 As
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Extended Life Order, the Order will be:
(1) Eligible for execution in time priority
if upon acceptance of the Order by the
System and during the Holding Period
thereafter, the midpoint price is within
the limit set by the participant; or (2)
held until the midpoint falls within the
limit set by the participant at which
time the Holding Period will commence
and thereafter the System will make the
Order eligible for execution in time
priority if the midpoint price remains
within the limit set by the participant
during the Holding Period. For example,
if the Best Bid was $11 and the Best
Offer was $11.06, the price of the
Midpoint Extended Life Order would be
$11.03. If a participant enters a
Midpoint Extended Life Order to buy
with a limit of $11.02, the Holding
Period would not begin until the
midpoint price is executable at $11.02
(i.e., the midpoint of the NBBO).11 If a
member takes an action on the Order
(e.g., amend, revise) the System will restart the clock based on the same
criteria.
Similar to other Orders with midpoint
pegging,12 Midpoint Extended Life
Orders are only available for execution
during Market Hours 13 and they may
not be designated with a time-in-force of
Immediate or Cancel (IOC),14 since the
IOC Time In Force, by its nature, are
[sic] inconsistent with the Holding
Period requirement of the proposal. If a
Midpoint Extended Life Order is
entered during Pre-Market Hours,15 the
System will hold the Order until
completion of the Opening Cross,
ranked in the time that it was received.
If a Midpoint Extended Life Order is
entered during Post-Market Hours,16 it
will be rejected by the System. Midpoint
Extended Life Orders are not eligible for
11 If a Midpoint Extended Life Order has met the
Holding Period requirement but the midpoint is no
longer within its limit, it will nonetheless be ranked
in time priority among other Midpoint Extended
Life Orders if the NBBO later moves such that it is
within the Order’s limit price.
12 See, e.g., Rule 4702(b)(5); see also Rule 4703(d).
13 Market Hours begin after the completion of the
Nasdaq Opening Cross (or at 9:30 a.m. ET in the
case of a security for which no Nasdaq Opening
Cross occurs). See Rule 4703(a). Nasdaq limits
midpoint orders to Market Hours because, among
other things, it believes that demand for such
Orders is limited to Market Hours, since the wider
spreads generally prevail during Pre-Market and
Post-Market Hours trading sessions. See notes 15
and 16, infra. Wider spreads would result in
execution prices more at variance from the NBBO
than would be the case during Market Hours.
14 See Rule 4703(a)(1).
15 The term ‘‘Pre-Market Hours’’ means the period
of time beginning at 4:00 a.m. ET and ending
immediately prior to the commencement of Market
Hours. See Rule 4701(g).
16 The term ‘‘Post-Market Hours’’ means the
period of time beginning immediately after the end
of Market Hours and ending at 8:00 p.m. ET. See
Rule 4701(g).
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the Nasdaq Opening, Halt and Closing
Crosses, and any Midpoint Extended
Life Orders that have not been executed
by the end of Market Hours will be
cancelled.17 Midpoint Extended Life
Orders in existence at the time a Halt
Cross is initiated will be ineligible to
execute and held by the System until
trading has resumed and the NBBO has
been received by Nasdaq. Also, like
other Orders with midpoint pegging, a
Midpoint Extended Life Order may be
executed in sub-pennies if necessary to
obtain a midpoint price.18 Last, a
Midpoint Extended Life Order must be
entered with a size of at least one round
lot, which will promote size in
Midpoint Extended Life Orders and
provide members with the most efficient
processing of Midpoint Extended Life
Orders. Any shares of a Midpoint
Extended Life Order remaining after an
execution that are less than a round lot
will be cancelled by the System.
A Midpoint Extended Life Order may
have a Minimum Quantity Order
Attribute.19 Like other Orders with a
Minimum Quantity Order Attribute, if
an eligible Midpoint Extended Life
Order has a Minimum Quantity Order
Attribute and an eligible contra-side
Midpoint Extended Life Order does not
meet the quantity requirement, neither
Order will execute. If another Midpoint
Extended Life Order is ranked in
priority behind the Midpoint Extended
Life Order with a Minimum Quantity
Order Attribute, it will execute against
the contra-interest instead, if it is
otherwise marketable.
As discussed above, unlike certain
delay mechanisms available on other
exchanges, use of the proposed
Midpoint Extended Life Order is wholly
voluntary, and thus does not subject all
members to the Holding Period. As a
consequence, there is no distortive
impact on market data as Midpoint
Extended Life Order would be trade
reported like any other Order. Moreover,
members will not need to take any
special steps to implement Midpoint
Extended Life Orders, since it is an
Order Type. In this regard, members,
Securities Information Processors and
market data consumers will not need to
make any changes to their systems to
account for Midpoint Extended Life
Orders in market data because they will
17 See
Rule 4703(d).
A sub-penny limit price entered by a
member would not be accepted by the System.
19 Minimum Quantity is an Order Attribute that
allows a Participant to provide that an Order will
not execute unless a specified minimum quantity of
shares can be obtained. A Participant may designate
that the minimum quantity condition be satisfied by
execution against multiple Orders or a single Order.
See Rule 4703(e).
18 Id.
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be reported the same as other midpoint
Orders, without any new or special
indication. In sum, the Midpoint
Extended Life Order is a simple
mechanism by which Nasdaq can
broaden its ecosystem of participants
with little impact to the operation of the
markets.
sradovich on DSK3GMQ082PROD with NOTICES
Implementation
Nasdaq plans to implement Midpoint
Extended Life Orders within thirty days
after Commission approval of the
proposal. Nasdaq will make the
Midpoint Extended Life Order available
to all members and to all securities
upon implementation. Nasdaq will
announce the implementation date by
Equity Trader Alert.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,20 in general, and furthers the
objectives of Section 6(b)(5) of the Act,21
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 emblematic of a
core function of a national securities
exchange, namely matching buyers and
sellers of securities on a transparent and
well-regulated market, and helping
these buyers and sellers come together
to receive the best execution possible.
Nasdaq is achieving this by permitting
Midpoint Extended Life Orders to
execute solely against other Midpoint
Extended Life Orders at the midpoint of
the NBBO in return for providing
market-improving behavior in the form
of a longer-lived midpoint order. As
noted above, Nasdaq believes that
programmatic or intentional delays for
all incoming Orders irrespective of
trading objectives and regardless as to
whether it is displayed or nondisplayed, insert complexity into the
market and are detrimental to overall
market structure. By contrast, Nasdaq’s
proposal seeks to provide a simple
mechanism by which market
participants with longer investment
horizons are able to source liquidity at
the midpoint of the NBBO. Importantly,
Midpoint Extended Life Orders will be
available to all members, yet are wholly
voluntary.
The proposed Midpoint Extended Life
Order will provide members an
20 15
21 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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opportunity to execute at the midpoint,
only interacting with other Midpoint
Extended Life Orders, in return for
allowing their Orders to remain
unchanged for the Holding Period. As
Nasdaq has noted before, 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. Nasdaq is implementing
Midpoint Extended Life Orders to
increase access to, and participation on,
Nasdaq for investors that are less
concerned with time to execution, but
rather are looking to source liquidity,
often in greater size, at the midpoint of
the NBBO against a contra-party Order
that has met the same objectives.
Currently, these market participants are
underweighted or do not represent these
Orders on Nasdaq, and the Midpoint
Extended Life Order will provide
additional tools to allow them to more
effectively implement their investment
strategies. Additionally, Midpoint
Extended Life Orders will provide these
participants with the many benefits
provided by a well-regulated exchange,
including transparency through publicly
available rules, certainty surrounding
trade execution, and market
surveillance. Midpoint Extended Life
Orders is wholly voluntary, available to
all members, and does not subject all
members to the Holding Period
regardless of time horizon or investment
objective, unlike certain delay
mechanisms available on other
exchanges. The Midpoint Extended Life
Order is a simple mechanism by which
Nasdaq can broaden its ecosystem of
participants with little impact to the
operation of the markets.
The Exchange believes that markets
and price discovery best function
through the interactions of a diverse set
of market participants. The Exchange
also believes that the evolution of the
markets which have brought many
beneficial efficiencies have also made it
difficult for some market participants to
participate on the Exchange. The
differentiation proposed herein by
Nasdaq is not designed to permit unfair
discrimination, but instead to promote
increased participation on the Exchange
by market participants that find it
difficult to do so today and provide
improved execution quality for market
participants that are less concerned with
time to execution. The Exchange
believes that the transparency and
competitiveness of offering Midpoint
Extended Life Orders on a registered
national securities exchange will result
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37251
in a better execution experience for all
investors.
The Exchange notes that other market
participants that enter orders that would
otherwise be eligible to execute against
a midpoint order will not be able to
execute against a Midpoint Extended
Life Order. The Exchange believes that
this is not unfairly discriminatory
because any market participant may
enter a Midpoint Extended Life Order,
thereby providing them access to other
Midpoint Extended Life Orders. The
Exchange notes that the statutory
standard under Section 6(b)(5) of the
Act is that the proposed change not
discriminate unfairly. Nasdaq does not
believe that providing an Order Type
available to all members discriminates
unfairly. To the contrary, Nasdaq
believes that the Midpoint Extended
Life Order will provide members with
choice and more opportunities to
interact on Nasdaq. Moreover, Nasdaq
believes that much of the Midpoint
Extended Life Orders will be entered by
participants that typically do not enter
Orders on Nasdaq for the reasons noted
above. As a consequence, the Exchange
does not believe that the current depth
of liquidity on the Nasdaq will be
impacted negatively, but rather
Midpoint Extended Life Orders will
provide members with the opportunity
to interact in new ways on the
Exchange. Consequently, the Exchange
does not believe the proposed change
discriminates unfairly.
The Exchange also believes that the
proposal will improve the ecosystem of
market participants on Nasdaq.
Midpoint orders generally provide price
improvement to both sides to a trade,
with each party sharing the ‘‘spread’’
between the bid and ask. Midpoint
Extended Life Orders will also provide
this benefit, but in a manner that will
allow the market participants to execute
against other Midpoint Extended Life
Orders that have met the same Holding
Period criteria. Since both sides of a
Midpoint Extended Life Order
execution are subject to the Holding
Period, it does not discriminate or
provide unfair advantages to either side
of the trade. This mechanism will
ensure that the Midpoint Extended Life
Order is fair, by not allowing a side to
the transaction to have an advantage
based on timing. Moreover, the
Exchange believes that Midpoint
Extended Life Orders should draw new
market participants to Nasdaq’s
transparent and well-regulated market.
Nasdaq, like other national securities
exchanges, is subject to the
requirements of the Exchange Act, is
regulated by the Commission, is subject
to inspection by the Commission, and
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must have transparent and fair rules
applied to all of its members.
Nasdaq believes that requiring
Midpoint Extended Life Orders to exist
unaltered for at least one half a second
is a meaningful time, representing a
significant level of risk taken by the
market participant in return for the
ability to receive a midpoint execution
with other Midpoint Extended Life
Orders, which have also met the
Holding Period requirement. Although,
one could argue that every stock is
unique in the amount of time that
represents a meaningful level of risk, the
Exchange believes that implementing a
program with individualized time
requirements would be overly complex
and would ultimately be too
cumbersome for the industry to adopt.
The Exchange came to the same
conclusion in designing the
requirements of the ELO Order
Attribute. As Nasdaq noted in its ELO
Order Attribute proposal, 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.22
Compliance with the Holding Period
will be enforced by the System, and
transactions in Midpoint Extended Life
Orders will be reported to the Securities
Information Processor and will be
provided in Nasdaq’s proprietary data
feed in the same manner as all other
transactions occurring on Nasdaq are
done currently, namely, without any
new or special indication that it is a
Midpoint Extended Life Order
execution.
As stated previously, the Exchange
believes that the proposed change will
benefit market participants that have
longer term investment horizons and
that often seek liquidity at the midpoint
of the NBBO. Moreover, Nasdaq does
not believe that the proposed Midpoint
Extended Life Order will negatively
affect the quality of the market because
the Exchange anticipates the Order Type
will draw new market participants to
the Exchange, which are currently
underserved. If the Exchange is
incorrect, there are many substitutes in
the market where market participants
22 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
17:00 Aug 08, 2017
Jkt 241001
can send their orders. There are twelve
other exchanges, over thirty registered
Alternative Trading Systems, and many
other non-registered off-exchange
trading platforms, which a participant
may choose to use if the execution
quality on Nasdaq suffers due to the
introduction of Midpoint Extended Life
Orders.
As the Commission noted in
approving the exchange application of
Investors Exchange LLC, the Exchange
Act does not foreclose reasonable and
not unfairly discriminatory innovations,
including those that are designed to
protect investors who seek to reliably
place passive, non-displayed pegged
orders on an exchange.23 For the reasons
noted above, Nasdaq believes that the
proposed Midpoint Extended Life Order
further perfects the mechanism of a free
and open market, promotes competition,
broadens participation on Nasdaq, and
considers the cost/benefit of
implementation.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Nasdaq recognizes that participants
that invest in capabilities that allow
them to drive price formation by
repeatedly improving the NBBO on the
Exchange bring tremendous value to the
market by providing efficient prices,
lowering costs for individual investors,
and supporting price formation and
stability for securities listed on Nasdaq
and other U.S. exchanges. Nasdaq
believes that Midpoint Extended Life
Orders can coexist with existing
participation strategies on Nasdaq to the
benefit of all Exchange participants. As
discussed above, the Exchange believes
that the Midpoint Extended Life Order
will draw new market participants to
Nasdaq, with which existing market
participants may interact by using the
Midpoint Extended Life Order. For this
reason, 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 and therefore
improves participation by allowing
certain market participants that may
currently be underserved on regulated
exchanges to compete based on
elements other than speed. Specifically,
the proposed change will allow market
participants that have not invested in
limit order queue placement but rather
take risk by allowing their midpoint
Order to exist unchanged for the
23 See Securities Exchange Act Release No. 78101
(June 17, 2016), 81 FR 41142, 41157 (June 23, 2016)
(File No. 10–222).
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
Holding Period to have the ability to
execute against other such Orders that
have rested unchanged for the same
duration. Although market participants
that choose not to submit Midpoint
Extended Life Orders will not have the
opportunity to interact with such
Orders, Nasdaq notes that this is solely
the choice of the member since the
Midpoint Extended Life Order is
available to all members but its use is
not compulsory. Additionally, adoption
of Midpoint Extended Life Orders will
not burden any market participants,
including those that choose not to use
these Orders, because no changes need
to be made to their systems to account
for Midpoint Extended Life Orders. As
discussed above, Midpoint Extended
Life Orders will be reported the same as
other midpoint Orders, without any new
or special indicator.
The Exchange believes that increasing
participation on Nasdaq will always
serve to improve the overall ecosystem
on the Exchange. To the extent that the
proposal can bring additional order flow
from different segments of the market
with different long term investment
goals to the Exchange, all market
participants will benefit. Thus, the aim
of the Proposal is not to disadvantage
any one set of market participant, but
rather to promote a healthy and
inclusive market that will benefit all
market participants, including those
that currently contribute significant
liquidity to the Exchange. Nasdaq
believes Midpoint Extended Life Orders
will provide a mechanism by which
certain market participants that struggle
to receive a midpoint execution at the
NBBO at any given moment the
opportunity to receive such an
execution, while also providing existing
participants an opportunity to interact
with these new participants through a
Midpoint Extended Life Order.
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 additional market
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participants, 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:
sradovich on DSK3GMQ082PROD with NOTICES
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–2017–074 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–2017–074. 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
VerDate Sep<11>2014
17:00 Aug 08, 2017
Jkt 241001
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–2017–074 and should be
submitted on or before August 30, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16743 Filed 8–8–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81312; File No. SR–MRX–
2017–13)
Self-Regulatory Organizations; Nasdaq
MRX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Establish Ports That
Members Use To Connect to the
Exchange
August 3, 2017.
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 July 20,
2017, Nasdaq MRX, LLC (‘‘MRX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
24 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
37253
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to (1)
establish ports that members use to
connect to the Exchange with the
migration of the Exchange’s trading
system to the Nasdaq INET architecture,
and (2) amend the Schedule of Fees to
adopt fees for those ports.
The text of the proposed rule change
is available on the Exchange’s Web site
at www.ise.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to: (1) Establish ports that
members use to connect to the Exchange
with the migration of the Exchange’s
trading system to the Nasdaq INET
architecture,3 and (2) amend the
Schedule of Fees to adopt fees for those
ports. In particular, the Exchange
proposes to establish and adopt fees for
the following connectivity options that
are available in connection with the replatform of the Exchange’s trading
system: Specialized Quote Feed
(‘‘SQF’’), SQF Purge, Ouch to Trade
Options (‘‘OTTO’’), Clearing Trade
Interface (‘‘CTI’’), Financial Information
eXchange (‘‘FIX’’), FIX Drop, and
Disaster Recovery. These port options,
which are described in more detail
below, are the same as those currently
used to connect to the Exchange’s
affiliates, including Nasdaq GEMX, LLC
(‘‘GEMX’’), Nasdaq Phlx (‘‘Phlx’’),
3 See Securities Exchange Act Release No. 80815
(May 30, 2017), 82 FR 25827 (June 5, 2017) (SR–
MRX–2017–02).
E:\FR\FM\09AUN1.SGM
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]]>Agencies
[Federal Register Volume 82, Number 152 (Wednesday, August 9, 2017)]
[Notices]
[Pages 37248-37253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16743]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81311; File No. SR-NASDAQ-2017-074]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt the Midpoint Extended
Life Order
August 3, 2017.
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 July 21, 2017, 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 the Midpoint Extended Life Order.
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.
[[Page 37249]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The U.S. equities markets are the envy of the world because they
are singularly effective at attracting and allocating capital to
innovative companies that create millions of jobs and trillions of
dollars of shareholder value, companies like Apple, Google, Facebook,
Amazon, Cisco Systems, Gilead, and thousands of other Nasdaq issuers.
As the listing venue and the steward of the market on which they are
listed, Nasdaq is compelled to make innovative changes to better the
quality of the market, to the benefit of issuers and the people that
invest in issuers' securities.
As discussed in detail below, Nasdaq is proposing to adopt the
Midpoint Extended Life Order as a new Order Type \3\ available to all
members, and by extension to their customers, which will reward market
participants that commit to a minimum half-second period (``Holding
Period''), during which their order remains unchanged. Midpoint
Extended Life Orders provide a mechanism by which market participants
may receive a midpoint execution with other Midpoint Extended Life
Orders that have also met the same Holding Period requirement. Like
Nasdaq's Extended Life Order Attribute,\4\ Nasdaq is continuing its
drive to provide innovative solutions to increase participation on the
market by a broader array of investors. Nasdaq proposed the Extended
Life Order Attribute as a first step in broadening participation on the
market by providing priority to retail orders that often have longer
term investment horizons. The Extended Life Order Attribute provides
retail market participants a mechanism by which they have more
opportunity to participate effectively at the prevailing market price
when transactions occur. Nasdaq is now proposing a new Order Type that
will allow all market participants to more effectively execute longer
term investment strategies--the Midpoint Extended Life Order.
---------------------------------------------------------------------------
\3\ 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. 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. An ``Order
Attribute'' is a 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. The available Order Types and Order
Attributes, and the Order Attributes that may be associated with
particular Order Types, are described in Rules 4702 and 4703. One or
more Order Attributes may be assigned to a single Order; provided,
however, that if the use of multiple Order Attributes would provide
contradictory instructions to an Order, the System will reject the
Order or remove non-conforming Order Attributes. See Rule 4701(e).
\4\ See Securities Exchange Act Release No. 81097 (July 7,
2017), 82 FR 32386 (July 13, 2017) (SR-NASDAQ-2016-161).
---------------------------------------------------------------------------
Background
The Exchange operates based on a price/display/time priority
execution algorithm.\5\ Simply put, 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. Midpoint Orders are non-displayed \6\ and allow participants to
receive price improvement by executing against other non-displayed
liquidity at the midpoint of the National Best Bid and Offer
(``NBBO''). Nasdaq believes that some market participants that are
looking for executions at the midpoint often have a longer investment
horizon (i.e., long term investors), many of which are seeking both the
best execution possible at the midpoint of the NBBO and are not
necessarily measuring execution quality solely by each tick by tick
change in market price. Some of these market participants with large-
sized Orders are seeking to gain such an execution while minimizing
market impact.
---------------------------------------------------------------------------
\5\ See Rule 4757.
\6\ Display is an Order Attribute that allows the price and size
of an Order to be displayed to market participants via market data
feeds. Certain Order Types may be non-displayed if they are not
assigned a Display Order Attribute, and all non-displayed Orders may
be referred to as ``Non-Displayed Orders.'' In contrast, an Order
with a Display Order Attribute may be referred to as a ``Displayed
Order.'' See Rule 4703(k).
---------------------------------------------------------------------------
Over time, as order placement competition on Nasdaq has grown, the
time that it takes for market participants to react to changes in the
markets has decreased significantly. 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. As a result of this decrease in reaction time and size of
orders, Nasdaq, and the equities markets in general, have become
incredibly efficient. The nature of today's equities markets, however,
have made it difficult for certain market participants that have longer
term investment horizons and that focus on minimizing market impact
rather than optimizing for queue placement. This is particularly true
for market participants that are attempting to trade large-sized
Orders.\7\
---------------------------------------------------------------------------
\7\ Nasdaq notes that market participants with large-sized
Orders and that are not necessarily monitoring small changes in the
NBBO or time to execution, include ``Institutional'' investors.
Institutional investors are generally characterized as large
entities that make investments on behalf of their owners or
investors, such as pension funds and mutual funds. Nonetheless,
Nasdaq believes that Midpoint Extended Life Orders will provide
benefit to a wide array of market participants. As noted above,
Midpoint Extended Life Orders are available to all Nasdaq members.
---------------------------------------------------------------------------
Nasdaq weighed various ideas on how to augment the interaction on
Nasdaq to meet the needs of these underserved market participants.
Nasdaq believes that it is better to provide incentives that protect
midpoint Orders by improving execution quality without impacting the
ability to manage risk and to reduce the potential for order adjustment
and cancellation, rather than apply blanket artificial latency
mechanisms that apply to all Orders, which may distort or have
unintended consequences on market quality such as disadvantaging
displayed Orders. Nasdaq is proposing to address the needs of market
participants that focus their trading on receiving midpoint execution
where time to execution is less important when working to meet their
long term investment needs. As discussed in detail below, Nasdaq is
proposing to provide the Midpoint Extended Life Order as a voluntary
option by which these market participants may participate on Nasdaq in
return for allowing their orders to exist unchanged for a certain time.
Proposal
The Exchange is proposing to adopt a new Order Type that will allow
all market participants that are less concerned with time to execution
to receive executions at the midpoint of the NBBO, while deemphasizing
speed as a factor in achieving the execution. Specifically, the
Midpoint Extended Life Order is an Order Type with a Non-
[[Page 37250]]
Display Order Attribute \8\ that is priced at the midpoint between the
NBBO and that will not be eligible to execute until the Holding Period
of one half of a second has passed after acceptance of the Order by the
System.\9\ The Holding Period represents a level of market risk that
the market participant has assumed in order to receive a midpoint
execution with other Midpoint Extended Life Orders, which have also met
the Holding Period requirement. Moreover, the Holding Period mitigates
risk that a market participant may attempt to access other Midpoint
Extended Life Orders just prior to a move in the NBBO, thereby
potentially negatively affecting the price at which the contra-side
Midpoint Extended Life Order would receive. In order to allow members
to effectively manage risk, a Midpoint Extended Life Order may be
cancelled at any time.
---------------------------------------------------------------------------
\8\ See note 6, supra.
\9\ As noted above, a Midpoint Extended Life Order must remained
[sic] unchanged for the Holding Period. If a Midpoint Extended Life
Order is modified by a member during the Holding Period, the System
will restart the Holding Period.
---------------------------------------------------------------------------
Once a Midpoint Extended Life Order becomes eligible to execute by
existing unchanged for the Holding Period, the Order may only execute
against other eligible Midpoint Extended Life Orders. Like other
midpoint pegged Orders,\10\ once the Midpoint Extended Life Order is
eligible, a buy (sell) Midpoint Extended Life Order will be ranked in
time order at the midpoint among other buy (sell) Midpoint Extended
Life Orders. As discussed above, limiting interaction of Midpoint
Extended Life Orders to other Midpoint Extended Life Orders mitigates
the impact that these orders will have on the market and allows market
participants entering such orders an increased chance of receiving a
full execution at the midpoint of the NBBO at a given time.
Importantly, limiting interaction of Midpoint Extended Life Orders
ensures fairness because all Midpoint Extended Life Orders have met the
same Holding Period requirement, thereby ensuring that members with
Midpoint Extended Life Order are not disadvantaged by non-Midpoint
Extended Life Orders entered by participant that have the benefit of
knowing, and reacting to, the current state of the market.
---------------------------------------------------------------------------
\10\ See also Rule 4703(d).
---------------------------------------------------------------------------
A Midpoint Extended Life Order may be assigned a limit price. A
limit price restricts the price at which an order may execute such that
an order to sell may not execute below a certain price and an order to
buy may not execute above a certain price. If a market participant
assigns a limit price to its Midpoint Extended Life Order, the Order
will be: (1) Eligible for execution in time priority if upon acceptance
of the Order by the System and during the Holding Period thereafter,
the midpoint price is within the limit set by the participant; or (2)
held until the midpoint falls within the limit set by the participant
at which time the Holding Period will commence and thereafter the
System will make the Order eligible for execution in time priority if
the midpoint price remains within the limit set by the participant
during the Holding Period. For example, if the Best Bid was $11 and the
Best Offer was $11.06, the price of the Midpoint Extended Life Order
would be $11.03. If a participant enters a Midpoint Extended Life Order
to buy with a limit of $11.02, the Holding Period would not begin until
the midpoint price is executable at $11.02 (i.e., the midpoint of the
NBBO).\11\ If a member takes an action on the Order (e.g., amend,
revise) the System will re-start the clock based on the same criteria.
---------------------------------------------------------------------------
\11\ If a Midpoint Extended Life Order has met the Holding
Period requirement but the midpoint is no longer within its limit,
it will nonetheless be ranked in time priority among other Midpoint
Extended Life Orders if the NBBO later moves such that it is within
the Order's limit price.
---------------------------------------------------------------------------
Similar to other Orders with midpoint pegging,\12\ Midpoint
Extended Life Orders are only available for execution during Market
Hours \13\ and they may not be designated with a time-in-force of
Immediate or Cancel (IOC),\14\ since the IOC Time In Force, by its
nature, are [sic] inconsistent with the Holding Period requirement of
the proposal. If a Midpoint Extended Life Order is entered during Pre-
Market Hours,\15\ the System will hold the Order until completion of
the Opening Cross, ranked in the time that it was received. If a
Midpoint Extended Life Order is entered during Post-Market Hours,\16\
it will be rejected by the System. Midpoint Extended Life Orders are
not eligible for the Nasdaq Opening, Halt and Closing Crosses, and any
Midpoint Extended Life Orders that have not been executed by the end of
Market Hours will be cancelled.\17\ Midpoint Extended Life Orders in
existence at the time a Halt Cross is initiated will be ineligible to
execute and held by the System until trading has resumed and the NBBO
has been received by Nasdaq. Also, like other Orders with midpoint
pegging, a Midpoint Extended Life Order may be executed in sub-pennies
if necessary to obtain a midpoint price.\18\ Last, a Midpoint Extended
Life Order must be entered with a size of at least one round lot, which
will promote size in Midpoint Extended Life Orders and provide members
with the most efficient processing of Midpoint Extended Life Orders.
Any shares of a Midpoint Extended Life Order remaining after an
execution that are less than a round lot will be cancelled by the
System.
---------------------------------------------------------------------------
\12\ See, e.g., Rule 4702(b)(5); see also Rule 4703(d).
\13\ Market Hours begin after the completion of the Nasdaq
Opening Cross (or at 9:30 a.m. ET in the case of a security for
which no Nasdaq Opening Cross occurs). See Rule 4703(a). Nasdaq
limits midpoint orders to Market Hours because, among other things,
it believes that demand for such Orders is limited to Market Hours,
since the wider spreads generally prevail during Pre-Market and
Post-Market Hours trading sessions. See notes 15 and 16, infra.
Wider spreads would result in execution prices more at variance from
the NBBO than would be the case during Market Hours.
\14\ See Rule 4703(a)(1).
\15\ The term ``Pre-Market Hours'' means the period of time
beginning at 4:00 a.m. ET and ending immediately prior to the
commencement of Market Hours. See Rule 4701(g).
\16\ The term ``Post-Market Hours'' means the period of time
beginning immediately after the end of Market Hours and ending at
8:00 p.m. ET. See Rule 4701(g).
\17\ See Rule 4703(d).
\18\ Id. A sub-penny limit price entered by a member would not
be accepted by the System.
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A Midpoint Extended Life Order may have a Minimum Quantity Order
Attribute.\19\ Like other Orders with a Minimum Quantity Order
Attribute, if an eligible Midpoint Extended Life Order has a Minimum
Quantity Order Attribute and an eligible contra-side Midpoint Extended
Life Order does not meet the quantity requirement, neither Order will
execute. If another Midpoint Extended Life Order is ranked in priority
behind the Midpoint Extended Life Order with a Minimum Quantity Order
Attribute, it will execute against the contra-interest instead, if it
is otherwise marketable.
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\19\ Minimum Quantity is an Order Attribute that allows a
Participant to provide that an Order will not execute unless a
specified minimum quantity of shares can be obtained. A Participant
may designate that the minimum quantity condition be satisfied by
execution against multiple Orders or a single Order. See Rule
4703(e).
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As discussed above, unlike certain delay mechanisms available on
other exchanges, use of the proposed Midpoint Extended Life Order is
wholly voluntary, and thus does not subject all members to the Holding
Period. As a consequence, there is no distortive impact on market data
as Midpoint Extended Life Order would be trade reported like any other
Order. Moreover, members will not need to take any special steps to
implement Midpoint Extended Life Orders, since it is an Order Type. In
this regard, members, Securities Information Processors and market data
consumers will not need to make any changes to their systems to account
for Midpoint Extended Life Orders in market data because they will
[[Page 37251]]
be reported the same as other midpoint Orders, without any new or
special indication. In sum, the Midpoint Extended Life Order is a
simple mechanism by which Nasdaq can broaden its ecosystem of
participants with little impact to the operation of the markets.
Implementation
Nasdaq plans to implement Midpoint Extended Life Orders within
thirty days after Commission approval of the proposal. Nasdaq will make
the Midpoint Extended Life Order available to all members and to all
securities upon implementation. Nasdaq will announce the implementation
date by Equity Trader Alert.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\20\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\21\ 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 emblematic of a core function
of a national securities exchange, namely matching buyers and sellers
of securities on a transparent and well-regulated market, and helping
these buyers and sellers come together to receive the best execution
possible. Nasdaq is achieving this by permitting Midpoint Extended Life
Orders to execute solely against other Midpoint Extended Life Orders at
the midpoint of the NBBO in return for providing market-improving
behavior in the form of a longer-lived midpoint order. As noted above,
Nasdaq believes that programmatic or intentional delays for all
incoming Orders irrespective of trading objectives and regardless as to
whether it is displayed or non-displayed, insert complexity into the
market and are detrimental to overall market structure. By contrast,
Nasdaq's proposal seeks to provide a simple mechanism by which market
participants with longer investment horizons are able to source
liquidity at the midpoint of the NBBO. Importantly, Midpoint Extended
Life Orders will be available to all members, yet are wholly voluntary.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
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The proposed Midpoint Extended Life Order will provide members an
opportunity to execute at the midpoint, only interacting with other
Midpoint Extended Life Orders, in return for allowing their Orders to
remain unchanged for the Holding Period. As Nasdaq has noted before, 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. Nasdaq is implementing
Midpoint Extended Life Orders to increase access to, and participation
on, Nasdaq for investors that are less concerned with time to
execution, but rather are looking to source liquidity, often in greater
size, at the midpoint of the NBBO against a contra-party Order that has
met the same objectives. Currently, these market participants are
underweighted or do not represent these Orders on Nasdaq, and the
Midpoint Extended Life Order will provide additional tools to allow
them to more effectively implement their investment strategies.
Additionally, Midpoint Extended Life Orders will provide these
participants with the many benefits provided by a well-regulated
exchange, including transparency through publicly available rules,
certainty surrounding trade execution, and market surveillance.
Midpoint Extended Life Orders is wholly voluntary, available to all
members, and does not subject all members to the Holding Period
regardless of time horizon or investment objective, unlike certain
delay mechanisms available on other exchanges. The Midpoint Extended
Life Order is a simple mechanism by which Nasdaq can broaden its
ecosystem of participants with little impact to the operation of the
markets.
The Exchange believes that markets and price discovery best
function through the interactions of a diverse set of market
participants. The Exchange also believes that the evolution of the
markets which have brought many beneficial efficiencies have also made
it difficult for some market participants to participate on the
Exchange. The differentiation proposed herein by Nasdaq is not designed
to permit unfair discrimination, but instead to promote increased
participation on the Exchange by market participants that find it
difficult to do so today and provide improved execution quality for
market participants that are less concerned with time to execution. The
Exchange believes that the transparency and competitiveness of offering
Midpoint Extended Life Orders on a registered national securities
exchange will result in a better execution experience for all
investors.
The Exchange notes that other market participants that enter orders
that would otherwise be eligible to execute against a midpoint order
will not be able to execute against a Midpoint Extended Life Order. The
Exchange believes that this is not unfairly discriminatory because any
market participant may enter a Midpoint Extended Life Order, thereby
providing them access to other Midpoint Extended Life Orders. The
Exchange notes that the statutory standard under Section 6(b)(5) of the
Act is that the proposed change not discriminate unfairly. Nasdaq does
not believe that providing an Order Type available to all members
discriminates unfairly. To the contrary, Nasdaq believes that the
Midpoint Extended Life Order will provide members with choice and more
opportunities to interact on Nasdaq. Moreover, Nasdaq believes that
much of the Midpoint Extended Life Orders will be entered by
participants that typically do not enter Orders on Nasdaq for the
reasons noted above. As a consequence, the Exchange does not believe
that the current depth of liquidity on the Nasdaq will be impacted
negatively, but rather Midpoint Extended Life Orders will provide
members with the opportunity to interact in new ways on the Exchange.
Consequently, the Exchange does not believe the proposed change
discriminates unfairly.
The Exchange also believes that the proposal will improve the
ecosystem of market participants on Nasdaq. Midpoint orders generally
provide price improvement to both sides to a trade, with each party
sharing the ``spread'' between the bid and ask. Midpoint Extended Life
Orders will also provide this benefit, but in a manner that will allow
the market participants to execute against other Midpoint Extended Life
Orders that have met the same Holding Period criteria. Since both sides
of a Midpoint Extended Life Order execution are subject to the Holding
Period, it does not discriminate or provide unfair advantages to either
side of the trade. This mechanism will ensure that the Midpoint
Extended Life Order is fair, by not allowing a side to the transaction
to have an advantage based on timing. Moreover, the Exchange believes
that Midpoint Extended Life Orders should draw new market participants
to Nasdaq's transparent and well-regulated market. Nasdaq, like other
national securities exchanges, is subject to the requirements of the
Exchange Act, is regulated by the Commission, is subject to inspection
by the Commission, and
[[Page 37252]]
must have transparent and fair rules applied to all of its members.
Nasdaq believes that requiring Midpoint Extended Life Orders to
exist unaltered for at least one half a second is a meaningful time,
representing a significant level of risk taken by the market
participant in return for the ability to receive a midpoint execution
with other Midpoint Extended Life Orders, which have also met the
Holding Period requirement. Although, one could argue that every stock
is unique in the amount of time that represents a meaningful level of
risk, the Exchange believes that implementing a program with
individualized time requirements would be overly complex and would
ultimately be too cumbersome for the industry to adopt. The Exchange
came to the same conclusion in designing the requirements of the ELO
Order Attribute. As Nasdaq noted in its ELO Order Attribute proposal,
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.\22\ Compliance with the
Holding Period will be enforced by the System, and transactions in
Midpoint Extended Life Orders will be reported to the Securities
Information Processor and will be provided in Nasdaq's proprietary data
feed in the same manner as all other transactions occurring on Nasdaq
are done currently, namely, without any new or special indication that
it is a Midpoint Extended Life Order execution.
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\22\ 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).
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As stated previously, the Exchange believes that the proposed
change will benefit market participants that have longer term
investment horizons and that often seek liquidity at the midpoint of
the NBBO. Moreover, Nasdaq does not believe that the proposed Midpoint
Extended Life Order will negatively affect the quality of the market
because the Exchange anticipates the Order Type will draw new market
participants to the Exchange, which are currently underserved. If the
Exchange is incorrect, there are many substitutes in the market where
market participants can send their orders. There are twelve other
exchanges, over thirty registered Alternative Trading Systems, and many
other non-registered off-exchange trading platforms, which a
participant may choose to use if the execution quality on Nasdaq
suffers due to the introduction of Midpoint Extended Life Orders.
As the Commission noted in approving the exchange application of
Investors Exchange LLC, the Exchange Act does not foreclose reasonable
and not unfairly discriminatory innovations, including those that are
designed to protect investors who seek to reliably place passive, non-
displayed pegged orders on an exchange.\23\ For the reasons noted
above, Nasdaq believes that the proposed Midpoint Extended Life Order
further perfects the mechanism of a free and open market, promotes
competition, broadens participation on Nasdaq, and considers the cost/
benefit of implementation.
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\23\ See Securities Exchange Act Release No. 78101 (June 17,
2016), 81 FR 41142, 41157 (June 23, 2016) (File No. 10-222).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq recognizes that participants that invest in capabilities
that allow them to drive price formation by repeatedly improving the
NBBO on the Exchange bring tremendous value to the market by providing
efficient prices, lowering costs for individual investors, and
supporting price formation and stability for securities listed on
Nasdaq and other U.S. exchanges. Nasdaq believes that Midpoint Extended
Life Orders can coexist with existing participation strategies on
Nasdaq to the benefit of all Exchange participants. As discussed above,
the Exchange believes that the Midpoint Extended Life Order will draw
new market participants to Nasdaq, with which existing market
participants may interact by using the Midpoint Extended Life Order.
For this reason, 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 and therefore improves
participation by allowing certain market participants that may
currently be underserved on regulated exchanges to compete based on
elements other than speed. Specifically, the proposed change will allow
market participants that have not invested in limit order queue
placement but rather take risk by allowing their midpoint Order to
exist unchanged for the Holding Period to have the ability to execute
against other such Orders that have rested unchanged for the same
duration. Although market participants that choose not to submit
Midpoint Extended Life Orders will not have the opportunity to interact
with such Orders, Nasdaq notes that this is solely the choice of the
member since the Midpoint Extended Life Order is available to all
members but its use is not compulsory. Additionally, adoption of
Midpoint Extended Life Orders will not burden any market participants,
including those that choose not to use these Orders, because no changes
need to be made to their systems to account for Midpoint Extended Life
Orders. As discussed above, Midpoint Extended Life Orders will be
reported the same as other midpoint Orders, without any new or special
indicator.
The Exchange believes that increasing participation on Nasdaq will
always serve to improve the overall ecosystem on the Exchange. To the
extent that the proposal can bring additional order flow from different
segments of the market with different long term investment goals to the
Exchange, all market participants will benefit. Thus, the aim of the
Proposal is not to disadvantage any one set of market participant, but
rather to promote a healthy and inclusive market that will benefit all
market participants, including those that currently contribute
significant liquidity to the Exchange. Nasdaq believes Midpoint
Extended Life Orders will provide a mechanism by which certain market
participants that struggle to receive a midpoint execution at the NBBO
at any given moment the opportunity to receive such an execution, while
also providing existing participants an opportunity to interact with
these new participants through a Midpoint Extended Life Order.
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
additional market
[[Page 37253]]
participants, 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-2017-074 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-2017-074. 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-2017-074 and should
be submitted on or before August 30, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16743 Filed 8-8-17; 8:45 am]
BILLING CODE 8011-01-P
