Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, To Adopt the Midpoint Extended Life Order, 10937-10941 [2018-04979]
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Federal Register / Vol. 83, No. 49 / Tuesday, March 13, 2018 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82825; File No. SR–
NASDAQ–2017–074]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment No. 3 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3, To Adopt
the Midpoint Extended Life Order
March 7, 2018.
I. Introduction
On July 21, 2017, The Nasdaq Stock
Market LLC (‘‘Exchange’’ or ‘‘Nasdaq’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to adopt the Midpoint Extended
Life Order (‘‘MELO’’). The proposed
rule change was published for comment
in the Federal Register on August 9,
2017.3 On August 9, 2017, the Exchange
filed Amendment No. 1 to the proposed
rule change.4 On September 21, 2017,
pursuant to Section 19(b)(2) of the Act,5
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change.6 The Commission initially
received three comment letters on the
proposed rule change.7 On October 30,
2017, the Exchange filed Amendment
No. 2 to the proposed rule change.8 On
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 81311
(August 3, 2017), 82 FR 37248 (‘‘Notice’’).
4 In Amendment No. 1, the Exchange updated the
proposal to reflect the approval of the proposal by
the Exchange’s Board of Directors on July 21, 2017.
Amendment No. 1 is available at https://
www.sec.gov/comments/sr-nasdaq-2017-074/
nasdaq2017074.htm. Because Amendment No. 1 is
a technical amendment that does not alter the
substance of the proposed rule change, it is not
subject to notice and comment.
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 81668,
82 FR 45095 (September 27, 2017). The
Commission designated November 7, 2017 as the
date by which the Commission shall approve or
disapprove, or institute proceedings to determine
whether to approve or disapprove, the proposed
rule change.
7 See Letters to Brent J. Fields, Secretary,
Commission, from Stephen John Berger, Managing
Director, Government & Regulatory Policy, Citadel
Securities, dated August 30, 2017 (‘‘Citadel Letter’’);
Ray Ross, Chief Technology Officer, The Clearpool
Group, dated September 12, 2017 (‘‘Clearpool
Letter’’); and Joanna Mallers, Secretary, FIA
Principal Traders Group, dated September 19, 2017
(‘‘FIA PTG Letter’’).
8 In Amendment No. 2, the Exchange: (1)
Modified the proposal to prevent MELOs from
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November 3, 2017, the Commission
published notice of Amendment No. 2
and instituted proceedings under
Section 19(b)(2)(B) of the Act 9 to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment Nos. 1 and 2.10
The Commission received one
additional comment letter on the
proposed rule change in response to the
Order Instituting Proceedings.11 On
February 5, 2018, pursuant to Section
19(b)(2) of the Act,12 the Commission
designated a longer period within which
to issue an order approving or
disapproving the proposed rule
change.13 On February 22, 2018, the
Exchange filed Amendment No. 3 to the
proposed rule change.14 The
Commission is publishing this notice to
solicit comments on Amendment No. 3
from interested persons, and is
approving the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3, on an accelerated basis.
II. Description of the Proposal
The Exchange proposed to offer the
MELO order type. A MELO would be a
non-displayed order priced at the
midpoint between the National Best Bid
and Offer (‘‘NBBO’’) and would not be
eligible to execute until a minimum
period of one half of a second (‘‘Holding
executing when there is a non-displayed order
priced more aggressively than the NBBO midpoint
resting on the Nasdaq book; (2) provided additional
description, clarification, and rationale for certain
aspects of the proposal; and (3) responded to
several concerns raised by commenters on the
proposal. Amendment No. 2 is available at https://
www.sec.gov/comments/sr-nasdaq-2017-074/
nasdaq2017074.htm.
9 15 U.S.C. 78s(b)(2)(B).
10 See Securities Exchange Act Release No. 82013,
82 FR 52075 (November 9, 2017) (‘‘Order Instituting
Proceedings’’).
11 See Letter to Brent J. Fields, Secretary,
Commission, from Edward K. Shin, dated December
8, 2017 (‘‘Shin Letter’’).
12 15 U.S.C. 78s(b)(2).
13 See Securities Exchange Act Release No. 82629,
83 FR 5822 (February 9, 2018). The Commission
designated March 7, 2018 as the date by which the
Commission shall either approve or disapprove the
proposed rule change.
14 In Amendment No. 3, the Exchange proposed
to publish weekly aggregated statistics showing the
number of shares and transactions of MELOs
executed on the Exchange by security. This
information would be published on
Nasdaqtrader.com with a two-week delay for MELO
executions in NMS stocks in Tier 1 of the NMS Plan
to Address Extraordinary Market Volatility (‘‘LULD
Plan’’) and a four-week delay for MELO executions
in all other NMS stocks. The Exchange also
proposed to publish monthly aggregated block-sized
trading statistics of total shares and total
transactions of MELOs executed on the Exchange.
This information would be published on
Nasdaqtrader.com no earlier than one month
following the end of the month for which trading
was aggregated. Amendment No. 3 is available at
https://www.sec.gov/comments/sr-nasdaq-2017074/nasdaq2017074.htm.
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10937
Period’’) has passed after acceptance of
the order by the system.15 Once eligible
to trade, MELOs would be ranked in
time priority at the NBBO midpoint
among other MELOs.16 If a limit price is
assigned to a MELO, the order would be:
(1) Eligible for execution in time priority
after satisfying the Holding Period if
upon acceptance of the order by the
system, 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 would commence and
thereafter the system would make the
order eligible for execution in time
priority.17
If a MELO is modified by a member
(other than to decrease the size of the
order or to modify the marking of a sell
order as long, short, or short exempt)
during the Holding Period, the system
would restart the Holding Period.18
Similarly, if a MELO is modified by a
member (other than to decrease the size
of the order or to modify the marking of
a sell order as long, short, or short
exempt) after it has become eligible to
execute, the order would have to satisfy
a new Holding Period.19
Movements in the NBBO while a
MELO is in the Holding Period would
not reset the Holding Period, even if, as
a result of the NBBO move, the MELO’s
limit price is less aggressive than the
NBBO midpoint.20 Also, if a MELO has
met the Holding Period, but the NBBO
midpoint is no longer within its limit,
it would nonetheless be ranked in time
priority among other MELOs if the
NBBO later moves such that the
midpoint is within the order’s limit
price (i.e., no new Holding Period).21
MELOs may be entered via any of the
Exchange’s communications protocols
and the type of communications
protocol used would not affect how the
system handles MELOs.22 If there is no
NBB or NBO, the Exchange would
accept MELOs but would not allow
MELO executions until there is an
NBBO.23 MELOs would be eligible to
15 See
proposed Nasdaq Rule 4702(b)(14)(A).
id.
17 See id.
18 See id. The Exchange noted that any change to
a MELO that would result in a change in the order’s
timestamp would result in the MELO being
considered altered, and thus the order would be
subject to a new Holding Period before being
eligible to trade and its priority would be based on
the new timestamp. See Amendment No. 2 at n.16.
19 See proposed Nasdaq Rule 4702(b)(14)(A).
20 See Amendment No. 2 at n.11.
21 See proposed Nasdaq Rule 4702(b)(14)(A);
Amendment No. 2 at n.15.
22 See Amendment No. 2 at n.10.
23 See id. at 12. If there is no NBB or NBO upon
entry of a MELO, the system would hold the order
16 See
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trade if the NBBO is locked.24 If the
NBBO is crossed, MELOs would be held
by the system until such time that the
NBBO is no longer crossed, at which
time they would be eligible to trade.25
MELOs may be cancelled at any time,
including during the Holding Period.26
MELOs would be active only during
Market Hours.27 MELOs entered during
Pre-Market Hours would be held by the
system in time priority until Market
Hours.28 MELOs entered during PostMarket Hours would not be accepted by
the system, and MELOs remaining
unexecuted after 4:00 p.m. ET would be
cancelled by the system.29 MELOs
would not be eligible for the Nasdaq
opening, halt, and closing crosses.30
MELOs must be entered with a size of
at least one round lot, and any shares of
a MELO remaining after an execution
that are less than one round lot would
be cancelled.31 MELOs may have a
minimum quantity order attribute.32
MELOs may not be designated with a
time-in-force of immediate or cancel
(‘‘IOC’’) and are ineligible for routing.33
They also may not have the discretion,
reserve size, attribution, intermarket
sweep order, display, or trade now order
attributes.34
Once a MELO becomes eligible to
execute by existing unchanged for the
Holding Period, the MELO may only
execute against other eligible MELOs.35
in time priority, together with any other MELOs
received while there is no NBB or NBO. See id.
Once there is an NBBO, the Holding Period would
begin for the held MELOs based on time priority.
See id.
24 See id. at 12–13.
25 See id. at 13.
26 See proposed Nasdaq Rule 4702(b)(14)(A).
27 See proposed Nasdaq Rule 4702(b)(14)(B).
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 Nasdaq Rule 4703(a).
28 See proposed Nasdaq Rule 4702(b)(14)(B).
‘‘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
Nasdaq Rule 4701(g). A MELO entered during PreMarket Hours would be held by the system until the
completion of the Opening Cross (or 9:30 a.m. ET
if no Opening Cross occurs), ranked in the time that
it was received by the Nasdaq book upon
satisfaction of the Holding Period. See Amendment
No. 2 at 11–12.
29 See proposed Nasdaq Rule 4702(b)(14)(B).
‘‘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 Nasdaq Rule
4701(g).
30 See proposed Nasdaq Rule 4703(l);
Amendment No. 2 at 12. MELOs in existence at the
time a halt is initiated would be ineligible to
execute and held by the system until trading has
resumed and the NBBO has been received by
Nasdaq. See proposed Nasdaq Rule 4702(b)(14)(A).
31 See proposed Nasdaq Rule 4702(b)(14)(B).
32 See id.
33 See id.; Amendment No. 2 at 11 and 13.
34 See Amendment No. 2 at 13–14.
35 See proposed Nasdaq Rule 4702(b)(14)(A).
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MELOs would not execute if there is a
resting non-displayed order priced more
aggressively than the NBBO midpoint,
and they instead would be held until
the resting non-displayed order is no
longer on the Nasdaq book or the NBBO
midpoint matches the price of the
resting non-displayed order.36 MELO
executions would be reported to
Securities Information Processors and
provided in Nasdaq’s proprietary data
feed without any new or special
indication.37 The Exchange would,
however, publish delayed weekly
aggregated statistics, as well as delayed
monthly aggregated block-sized trading
statistics, for MELO executions.38
Specifically, the Exchange would
publish on Nasdaqtrader.com weekly
aggregated statistics showing the
number of shares and transactions of
MELOs executed on Nasdaq by
security.39 This information would be
published with a two-week delay for
NMS stocks in Tier 1 of the LULD Plan,
and a four-week delay for all other NMS
stocks.40 The Exchange also would
publish on Nasdaqtrader.com monthly
aggregated block-sized trading statistics
of total shares and total transactions of
MELOs executed on Nasdaq.41 This
information would be published no
earlier than one month following the
end of the month for which trading was
aggregated.42 Under the proposal, a
transaction would be considered ‘‘blocksized’’ if it meets any of the following
criteria: (1) 10,000 or more shares; (2)
$200,000 or more in value; (3) 10,000 or
more shares and $200,000 or more in
value; (4) 2,000 to 9,999 shares; (5)
$100,000 to $199,999 in value; or (6)
2,000 to 9,999 shares and $100,000 to
$199,999 in value.43
As proposed, MELOs would be
subject to real-time surveillance to
determine if the order type is being
abused by market participants.44 In
addition, the Exchange intends to
implement a process, at the same time
as the implementation of MELOs, to
monitor the use of MELOs with the
intent to apply additional measures, as
necessary, to ensure their usage is
appropriately tied to the intent of the
order type.45 The Exchange stated that
this process may include metrics tied to
participant behavior, such as the
36 See
id.; Amendment No. 2 at 9.
Amendment No. 2 at 15.
38 See proposed Nasdaq Rule 4702(b)(14)(A);
Amendment No. 3 at 3–6.
39 See proposed Nasdaq Rule 4702(b)(14)(A).
40 See id.
41 See id.
42 See id.
43 See id.
44 See Amendment No. 2 at 22.
45 See id.
percentage of MELOs that are cancelled
prior to the completion of the Holding
Period, the average duration of MELOs,
and the percentage of MELOs where the
NBBO midpoint is within the limit price
when received.46 The Exchange stated
that it is committed to determining
whether there is opportunity or
prevalence of behavior that is
inconsistent with normal risk
management behavior.47 According to
the Exchange, manipulative abuse is
subject to potential disciplinary action
under the Exchange’s rules, and other
behavior that is not necessarily
manipulative but nonetheless frustrates
the purposes of the MELO order type
may be subject to penalties or other
participant requirements to discourage
such behavior, should it occur.48
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3, is consistent with the requirements of
the Act and the rules and regulations
thereunder applicable to a national
securities exchange.49 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,50 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, and that the rules are
not designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers; and Section
6(b)(8) of the Act,51 which requires that
the rules of a national securities
exchange not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
The Commission has carefully
considered the MELO order type and
finds that it is consistent with the Act.
The Commission believes that the
MELO order type could create
37 See
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46 See
id.
id. at 22–23.
48 See id. at 23.
49 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
50 15 U.S.C. 78f(b)(5).
51 15 U.S.C. 78f(b)(8).
47 See
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additional and more efficient trading
opportunities on the Exchange for
investors with longer investment time
horizons, including institutional
investors, and provide these investors
with an ability to limit the information
leakage and the market impact that
could result from their orders.
As noted above, the Commission
received four comment letters on the
proposed rule change.52 One commenter
supported the proposed rule change,
stating that MELOs could provide a
valuable tool for investors (particularly
institutional investors) seeking to
execute in large size to effectively
implement their investment strategies
on an exchange and could attract longerterm market participants to Nasdaq.53
This commenter also stated the benefits
to investors of trading MELOs on an
exchange as compared to off-exchange
trading venues.54 In particular, the
commenter noted that trading on an
exchange is open to all participants, and
is a far fairer, more transparent way for
markets to operate in contrast to offexchange trading venues.55
Two commenters expressed the
concern that MELOs would create a
separate order book within the Nasdaq
matching system where only MELOs
could interact with each other.56 One of
these commenters stated that the
proposal represents an unprecedented
level of exchange-based order flow
segmentation.57 This commenter
acknowledged the existence of limited
exchange-based mechanisms that have
the effect of restricting some order flow
interaction, but contended that the
proposal goes significantly beyond any
such existing restrictions.58 The other
commenter also asserted that artificially
introducing latency negatively impacts
the price discovery and formation
functions of the Exchange.59
In addition, one commenter remarked
that market participants with
marketable held orders or resting orders
seeking to execute against marketable
held order flow would be unlikely to
utilize MELOs because marketable held
orders are typically required to be
executed fully and promptly.60
According to the commenter, as use of
the MELO order book increases,
52 See
supra notes 7 and 11.
Clearpool Letter at 1–3.
54 See id. at 2.
55 See id.
56 See Citadel Letter at 1–3; FIA PTG Letter at 2.
57 See Citadel Letter at 1. This commenter noted
that the proposal would result in two orders on the
Exchange failing to interact when one order is a
MELO and the other order is not. See id. at 3.
58 See id.
59 See FIA PTG Letter at 2.
60 See Citadel Letter at 1–2.
liquidity in the non-MELO order book
could be negatively impacted to the
detriment of retail investors.61 In
addition, the commenter stated that
investors submitting resting MELOs
would not be able to interact with
marketable held order flow.62 The
commenter suggested that the Exchange
could partially mitigate the negative
impacts of MELO order segmentation by
revising its proposal to allow any order
to immediately interact with a resting
MELO as long as it is priced beyond the
midpoint.63
In contrast, one commenter stated that
allowing MELOs to interact with nonMELOs would defeat the purpose of the
MELO order type.64 This commenter
also stated that it does not believe that
the proposal would negatively impact
liquidity or price discovery on the
Nasdaq market because the MELO order
type should have little to no detrimental
effect on participants using other order
types.65 According to this commenter,
to the extent that the MELO order type
would provide incentives for order flow
to be directed to a fair access exchange
and away from private market centers,
price discovery for the broader markets
might improve.66
The Exchange responded to these
comments in Amendment No. 2, and
stated that although MELOs may forgo
the opportunity to interact with other
liquidity on the Exchange, MELO users
will have accepted this possibility in
return for the ability to interact with
other market participants with the same
time horizon.67 The Exchange also
compared MELOs to the minimum
quantity order attribute, as well as the
retail price improving orders available
on Nasdaq BX, Inc.68 The Exchange
stated that both of these types of orders
provide the opportunity to interact with
orders meeting certain characteristics,
and consequently may miss the
opportunity to receive an execution if
the contra-side order does not meet the
specified characteristics.69 The
Exchange also stated that it is not unfair
or discriminatory that non-displayed
orders resting on Nasdaq that are priced
more aggressively than the NBBO
midpoint would not participate in
MELO executions.70 According to the
Exchange, the use of resting nondisplayed orders and MELOs would be
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61 See
id. at 2.
id.
63 See id.
64 See Clearpool Letter at 3.
65 See id.
66 See id.
67 See Amendment No. 2 at 19.
68 See id.
69 See id.
70 See id. at 20.
62 See
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10939
available to all Exchange participants,
who need to evaluate which order type
best serves their investment needs.71
The Exchange also noted that it
conducted a pro forma study of the
effect of applying MELOs to the current
market by reviewing all executions
occurring on Nasdaq in August 2017,
and found that only 0.37% of resting
non-displayed orders traded at a price
better than the prevailing midpoint at
the time of execution.72 According to
the Exchange, consequently, the number
of situations in which a participant
would have to consider the trade-offs
between posting a non-displayed buy
(sell) order at a higher (lower) price as
compared to submitting a MELO is
minimal.73 In addition, the Exchange
reiterated that all members may use
MELOs and thus have access to MELO
liquidity.74 Finally, the Exchange
amended the proposal to provide that
MELOs would not execute if there is a
resting non-displayed order priced more
aggressively than the NBBO midpoint;
rather, MELOs would be held until the
resting non-displayed order is no longer
on the Nasdaq book or the NBBO
midpoint matches the price of the
resting non-displayed order.75
The Commission believes that the
proposed MELO order type is
reasonably designed to enhance
midpoint execution quality on the
Exchange. The Commission notes that
the concept of exchange order types or
attributes that permit market
participants to elect not to execute
against certain contra-side interest is not
novel. Existing order functionalities,
such as the minimum quantity and postonly conditions, enable market
participants to direct their orders to
execute only if certain conditions are
met by contra-side order flow. The
Commission also notes that the Holding
Period introduced by the Exchange’s
proposal is specific to MELOs and thus
does not introduce latency with respect
to any other type of trading interest on
the Exchange. Moreover, as noted above,
the MELO order type (including its
Holding Period) could create additional
and more efficient trading opportunities
on the Exchange for investors with
longer investment time horizons. In
addition, the Commission notes that,
unlike a scenario in which orders are
directed among multiple separate
trading venues where price priority
might not be available among the orders,
71 See
id.
id. at 21.
73 See id.
74 See id.
75 See id. at 9; proposed Nasdaq Rule
4702(b)(14)(A).
72 See
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the Exchange’s proposal would ensure
that a MELO does not execute at a price
that is inferior to the price of a resting
non-displayed order (i.e., a resting order
priced more aggressively than the NBBO
midpoint). Finally, the Commission
notes that all Nasdaq members may
utilize MELOs if they so choose.
Accordingly, the Commission believes
that the Exchange’s proposal represents
a reasonable effort to enhance the ability
of longer-term trading interest to
participate effectively on an exchange,
without discriminating unfairly against
other market participants or
inappropriately or unnecessarily
burdening competition.
One commenter raised the concern
that, under the proposal, MELO
executions would be reported to the
Securities Information Processors and
provided on Nasdaq’s proprietary data
feed in the same manner as all other
transactions on Nasdaq.76 This
commenter stated that this approach
likely would raise concerns about
market fairness and introduce
significant complexity for investors,
broker-dealers, and regulators when
attempting to analyze market activity
and assess execution quality.77 This
commenter noted, by way of example,
that investors may see their orders
executed on Nasdaq at worse prices
than other contemporaneous executions
on Nasdaq and that, without Nasdaq
labeling MELO executions as such,
investors may not know why this has
occurred.78 This commenter also
asserted that, without labeling MELO
executions differently than other
executions on Nasdaq, broker-dealer
routing logic may be influenced by
liquidity that is not actually accessible,
and regulators may experience
difficulties in accurately filtering market
data when evaluating compliance with
regulatory requirements such as best
execution.79 This commenter urged the
Commission to require that executions
resulting from MELOs be marked as
such on the tape.80
By contrast, one commenter stated
that it does not believe that the lack of
specific identification of MELOs in
trade reports would result in any
difficulties for the markets, or
complexity for investors or other market
participants when assessing execution
quality.81 According to this commenter,
MELO users would be provided with
76 See
Citadel Letter at 3.
id.
78 See id.
79 See id.
80 See id. Alternatively, the commenter suggested
that Nasdaq offer the MELO order type on a
separate exchange. See id.
81 See Clearpool Letter at 2.
77 See
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anonymity and confidentiality, which
the commenter asserted are critical tools
in preventing potentially predatory
counterparties from determining
intention and using that information to
generate short-term profits at the
expense of longer-term investors.82 In
addition, this commenter stated that
exchanges currently offer many order
types that when executed do not
indicate exactly which order types were
used.83
The Exchange responded to these
comments in Amendment No. 2, and
noted that transactions in MELOs would
be reported to the Securities Information
Processors and provided in Nasdaq’s
proprietary data feed in the same
manner as all other transactions
occurring on Nasdaq are done currently
(i.e., without any new or special
indication that a transaction is a MELO
execution).84 According to the
Exchange, not identifying MELO
executions in real-time is important to
ensuring that investors are protected
from market participants that would
otherwise take advantage of the
knowledge of MELO executions and
undermine the usefulness of the order
type.85 In particular, according to the
Exchange, MELO is designed to increase
access to, and participation on, Nasdaq
for investors that are less concerned
with the time to execution, but rather
are looking to source liquidity, often in
greater size, at the NBBO midpoint
against a counterparty order that has the
same objectives.86 The Exchange noted
that the proposal is designed to help
ensure that members with MELOs are
not disadvantaged by other order types
entered by participants that have the
benefit of knowing, and reacting to,
rapid changes in the market.87
Moreover, in Amendment No. 3, the
Exchange proposed to publish delayed
execution volume statistics for MELOs.
As discussed above, the Exchange
proposed to publish weekly aggregated
volume statistics regarding the number
of shares and transactions of MELOs
executed on the Exchange by security,
as well as monthly aggregated blocksized trading statistics of total shares
and total transactions of MELOs
executed on the Exchange.88 The
weekly aggregated information would be
published on Nasdaqtrader.com with a
two-week delay for NMS stocks in Tier
1 of the LULD Plan and a four-week
id.
id.
84 See Amendment No. 2 at 25.
85 See id.
86 See id. at 17.
87 See id. at 9.
88 See proposed Nasdaq Rule 4702(b)(14)(A).
delay for all other NMS stocks.89 The
monthly aggregated information would
be published on Nasdaqtrader.com no
earlier than one month following the
end of the month for which trading was
aggregated.90
The Commission notes that the
proposed MELO order type is intended
to provide additional execution
opportunities on the Exchange for
market participants that may not be as
sensitive to very short-term changes in
the NBBO and are willing to wait a
prescribed period of time following
their order submission to receive a
potential execution against other market
participants that have similarly elected
to forgo an immediate execution. In
particular, the proposed MELO order
type is intended to mitigate the risk that
an opportunistic low-latency trader will
be able to execute against a member’s
order at a time that is disadvantageous
to the member, such as just prior to a
change in the NBBO. The Commission
also believes that the proposal to
publish delayed aggregated statistics for
MELO executions is reasonably
designed to provide transparency
regarding MELO executions on the
Exchange without undermining the
usefulness of the order type by limiting
the potential information leakage and
the resulting market impact that could
be associated with non-delayed
identification of individual MELO
executions.
One commenter asserted that allowing
MELOs to be cancelled at any time
during the Holding Period does not
appear to be consistent with the
intended use of the order type.91
Instead, according to this commenter, a
MELO should only be permitted to be
cancelled after the Holding Period has
expired and the order has been placed
in the order book.92 Another commenter
expressed concern that high-frequency
traders and algorithms could take
advantage of MELOs.93 By contrast, one
commenter did not have an issue with
providing market participants the ability
to cancel MELOs during the Holding
Period.94 This commenter stated that it
believes this would be an important
feature of the MELO order type because
many firms use algorithms to source
liquidity simultaneously from multiple
venues.95 According to the commenter,
to the extent that liquidity is found
elsewhere than Nasdaq within the
82 See
89 See
83 See
90 See
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
id.
id.
91 See Citadel Letter at 4.
92 See id.
93 See Shin Letter.
94 See Clearpool Letter at 3.
95 See id.
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Federal Register / Vol. 83, No. 49 / Tuesday, March 13, 2018 / Notices
amozie on DSK30RV082PROD with NOTICES
Holding Period, it would be critically
important that the firm be able to cancel
its orders from Nasdaq and re-allocate
those shares to other venues.96 This
commenter stated that it does not
believe any market participants would
be harmed in such a circumstance.97
In Amendment No. 2, the Exchange
responded that MELOs may be
cancelled at any time, including during
the Holding Period, to allow members to
effectively manage risk.98 The Exchange
also acknowledged that the potential
exists for some participants to use
MELOs in a way that conflicts with the
stated intention of the order type to
allow longer term investors the
opportunity to safely find like-minded
counterparties at the midpoint on
Nasdaq.99 For this reason, the Exchange
represented that MELOs would be
subject to real-time surveillance to
determine if the order type is being
abused by market participants.100 The
Exchange also stated that it plans to
implement a process, at the same time
as the implementation of MELOs, to
monitor the use of MELOs, with the
intent to apply additional measures, as
necessary, to ensure that their usage is
appropriately tied to the intent of the
order type.101 According to the
Exchange, this process may include
metrics tied to participant behavior,
such as the percentage of MELOs
cancelled prior to completion of the
Holding Period, the average duration of
MELOs, and the percentage of MELOs
where the NBBO midpoint is within the
limit price when received.102 The
Exchange stated that manipulative
abuse is subject to potential disciplinary
action under the Exchange’s rules, and
other behavior that frustrates the
purposes of the MELO order type may
be subject to penalties or other
requirements to discourage such
behavior, should it occur.103
The Commission believes that the
Exchange’s proposed measures are
reasonably designed to deter potential
improper use of the proposed MELO
order type. In particular, the
Commission notes that the Exchange
has represented that it will conduct realtime surveillance to monitor the use of
MELOs and ensure that such usage is
appropriately tied to the intent of the
order type.104 Moreover, importantly,
the Exchange will measure the metrics
96 See
id.
id.
98 See Amendment No. 2 at 8.
99 See id. at 22.
100 See id.
101 See id.
102 See id.
103 See id. at 23.
104 See id. at 22–23.
97 See
VerDate Sep<11>2014
17:47 Mar 12, 2018
noted above that reflect participant
behavior with respect to MELOs, such
as the percentage of a participant’s
MELOs that are cancelled prior to the
completion of the Holding Period.105 As
the Exchange represented in its filing,
the Commission expects the Exchange
to continue to evaluate whether
additional measures may be necessary
to ensure that MELOs are used in a
manner consistent with the intended
purpose of the order type.106
IV. Solicitation of Comments on
Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 3 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 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 website (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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment 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 April
3, 2018.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment Nos. 1, 2, and 3
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 1, 2, and
3, prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment No. 3 in the Federal
Register. As discussed above, in
Amendment No. 3, the Exchange
proposed to provide on
Nasdaqtrader.com certain delayed
aggregated volume statistics for MELOs
executed on the Exchange. The
Commission notes that Amendment No.
3 is designed to provide transparency
regarding MELO executions on the
Exchange. Accordingly, the Commission
finds good cause, pursuant to Section
19(b)(2) of the Act,107 to approve the
proposed rule change, as modified by
Amendment Nos. 1, 2, and 3, on an
accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,108 that the
proposed rule change (SR–NASDAQ–
2017–074), as modified by Amendment
Nos. 1, 2, and 3 be, and hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.109
Brent J. Fields,
Secretary.
[FR Doc. 2018–04979 Filed 3–12–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
33043; 812–14882]
Corporate Capital Trust, Inc., et al.
March 8, 2018.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
107 15
105 See
id. at 22.
106 See id.
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U.S.C. 78s(b)(2).
108 Id.
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]]>Agencies
[Federal Register Volume 83, Number 49 (Tuesday, March 13, 2018)]
[Notices]
[Pages 10937-10941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04979]
[[Page 10937]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82825; File No. SR-NASDAQ-2017-074]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2,
and 3, To Adopt the Midpoint Extended Life Order
March 7, 2018.
I. Introduction
On July 21, 2017, The Nasdaq Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt the Midpoint Extended Life Order
(``MELO''). The proposed rule change was published for comment in the
Federal Register on August 9, 2017.\3\ On August 9, 2017, the Exchange
filed Amendment No. 1 to the proposed rule change.\4\ On September 21,
2017, pursuant to Section 19(b)(2) of the Act,\5\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to approve or disapprove the proposed rule
change.\6\ The Commission initially received three comment letters on
the proposed rule change.\7\ On October 30, 2017, the Exchange filed
Amendment No. 2 to the proposed rule change.\8\ On November 3, 2017,
the Commission published notice of Amendment No. 2 and instituted
proceedings under Section 19(b)(2)(B) of the Act \9\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment Nos. 1 and 2.\10\ The Commission received one additional
comment letter on the proposed rule change in response to the Order
Instituting Proceedings.\11\ On February 5, 2018, pursuant to Section
19(b)(2) of the Act,\12\ the Commission designated a longer period
within which to issue an order approving or disapproving the proposed
rule change.\13\ On February 22, 2018, the Exchange filed Amendment No.
3 to the proposed rule change.\14\ The Commission is publishing this
notice to solicit comments on Amendment No. 3 from interested persons,
and is approving the proposed rule change, as modified by Amendment
Nos. 1, 2, and 3, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 81311 (August 3,
2017), 82 FR 37248 (``Notice'').
\4\ In Amendment No. 1, the Exchange updated the proposal to
reflect the approval of the proposal by the Exchange's Board of
Directors on July 21, 2017. Amendment No. 1 is available at https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074.htm. Because
Amendment No. 1 is a technical amendment that does not alter the
substance of the proposed rule change, it is not subject to notice
and comment.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 81668, 82 FR 45095
(September 27, 2017). The Commission designated November 7, 2017 as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
\7\ See Letters to Brent J. Fields, Secretary, Commission, from
Stephen John Berger, Managing Director, Government & Regulatory
Policy, Citadel Securities, dated August 30, 2017 (``Citadel
Letter''); Ray Ross, Chief Technology Officer, The Clearpool Group,
dated September 12, 2017 (``Clearpool Letter''); and Joanna Mallers,
Secretary, FIA Principal Traders Group, dated September 19, 2017
(``FIA PTG Letter'').
\8\ In Amendment No. 2, the Exchange: (1) Modified the proposal
to prevent MELOs from executing when there is a non-displayed order
priced more aggressively than the NBBO midpoint resting on the
Nasdaq book; (2) provided additional description, clarification, and
rationale for certain aspects of the proposal; and (3) responded to
several concerns raised by commenters on the proposal. Amendment No.
2 is available at https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074.htm.
\9\ 15 U.S.C. 78s(b)(2)(B).
\10\ See Securities Exchange Act Release No. 82013, 82 FR 52075
(November 9, 2017) (``Order Instituting Proceedings'').
\11\ See Letter to Brent J. Fields, Secretary, Commission, from
Edward K. Shin, dated December 8, 2017 (``Shin Letter'').
\12\ 15 U.S.C. 78s(b)(2).
\13\ See Securities Exchange Act Release No. 82629, 83 FR 5822
(February 9, 2018). The Commission designated March 7, 2018 as the
date by which the Commission shall either approve or disapprove the
proposed rule change.
\14\ In Amendment No. 3, the Exchange proposed to publish weekly
aggregated statistics showing the number of shares and transactions
of MELOs executed on the Exchange by security. This information
would be published on Nasdaqtrader.com with a two-week delay for
MELO executions in NMS stocks in Tier 1 of the NMS Plan to Address
Extraordinary Market Volatility (``LULD Plan'') and a four-week
delay for MELO executions in all other NMS stocks. The Exchange also
proposed to publish monthly aggregated block-sized trading
statistics of total shares and total transactions of MELOs executed
on the Exchange. This information would be published on
Nasdaqtrader.com no earlier than one month following the end of the
month for which trading was aggregated. Amendment No. 3 is available
at https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074.htm.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposed to offer the MELO order type. A MELO would be
a non-displayed order priced at the midpoint between the National Best
Bid and Offer (``NBBO'') and would not be eligible to execute until a
minimum period of one half of a second (``Holding Period'') has passed
after acceptance of the order by the system.\15\ Once eligible to
trade, MELOs would be ranked in time priority at the NBBO midpoint
among other MELOs.\16\ If a limit price is assigned to a MELO, the
order would be: (1) Eligible for execution in time priority after
satisfying the Holding Period if upon acceptance of the order by the
system, 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 would commence and
thereafter the system would make the order eligible for execution in
time priority.\17\
---------------------------------------------------------------------------
\15\ See proposed Nasdaq Rule 4702(b)(14)(A).
\16\ See id.
\17\ See id.
---------------------------------------------------------------------------
If a MELO is modified by a member (other than to decrease the size
of the order or to modify the marking of a sell order as long, short,
or short exempt) during the Holding Period, the system would restart
the Holding Period.\18\ Similarly, if a MELO is modified by a member
(other than to decrease the size of the order or to modify the marking
of a sell order as long, short, or short exempt) after it has become
eligible to execute, the order would have to satisfy a new Holding
Period.\19\
---------------------------------------------------------------------------
\18\ See id. The Exchange noted that any change to a MELO that
would result in a change in the order's timestamp would result in
the MELO being considered altered, and thus the order would be
subject to a new Holding Period before being eligible to trade and
its priority would be based on the new timestamp. See Amendment No.
2 at n.16.
\19\ See proposed Nasdaq Rule 4702(b)(14)(A).
---------------------------------------------------------------------------
Movements in the NBBO while a MELO is in the Holding Period would
not reset the Holding Period, even if, as a result of the NBBO move,
the MELO's limit price is less aggressive than the NBBO midpoint.\20\
Also, if a MELO has met the Holding Period, but the NBBO midpoint is no
longer within its limit, it would nonetheless be ranked in time
priority among other MELOs if the NBBO later moves such that the
midpoint is within the order's limit price (i.e., no new Holding
Period).\21\
---------------------------------------------------------------------------
\20\ See Amendment No. 2 at n.11.
\21\ See proposed Nasdaq Rule 4702(b)(14)(A); Amendment No. 2 at
n.15.
---------------------------------------------------------------------------
MELOs may be entered via any of the Exchange's communications
protocols and the type of communications protocol used would not affect
how the system handles MELOs.\22\ If there is no NBB or NBO, the
Exchange would accept MELOs but would not allow MELO executions until
there is an NBBO.\23\ MELOs would be eligible to
[[Page 10938]]
trade if the NBBO is locked.\24\ If the NBBO is crossed, MELOs would be
held by the system until such time that the NBBO is no longer crossed,
at which time they would be eligible to trade.\25\ MELOs may be
cancelled at any time, including during the Holding Period.\26\
---------------------------------------------------------------------------
\22\ See Amendment No. 2 at n.10.
\23\ See id. at 12. If there is no NBB or NBO upon entry of a
MELO, the system would hold the order in time priority, together
with any other MELOs received while there is no NBB or NBO. See id.
Once there is an NBBO, the Holding Period would begin for the held
MELOs based on time priority. See id.
\24\ See id. at 12-13.
\25\ See id. at 13.
\26\ See proposed Nasdaq Rule 4702(b)(14)(A).
---------------------------------------------------------------------------
MELOs would be active only during Market Hours.\27\ MELOs entered
during Pre-Market Hours would be held by the system in time priority
until Market Hours.\28\ MELOs entered during Post-Market Hours would
not be accepted by the system, and MELOs remaining unexecuted after
4:00 p.m. ET would be cancelled by the system.\29\ MELOs would not be
eligible for the Nasdaq opening, halt, and closing crosses.\30\
---------------------------------------------------------------------------
\27\ See proposed Nasdaq Rule 4702(b)(14)(B). 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 Nasdaq Rule 4703(a).
\28\ See proposed Nasdaq Rule 4702(b)(14)(B). ``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
Nasdaq Rule 4701(g). A MELO entered during Pre-Market Hours would be
held by the system until the completion of the Opening Cross (or
9:30 a.m. ET if no Opening Cross occurs), ranked in the time that it
was received by the Nasdaq book upon satisfaction of the Holding
Period. See Amendment No. 2 at 11-12.
\29\ See proposed Nasdaq Rule 4702(b)(14)(B). ``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 Nasdaq Rule 4701(g).
\30\ See proposed Nasdaq Rule 4703(l); Amendment No. 2 at 12.
MELOs in existence at the time a halt is initiated would be
ineligible to execute and held by the system until trading has
resumed and the NBBO has been received by Nasdaq. See proposed
Nasdaq Rule 4702(b)(14)(A).
---------------------------------------------------------------------------
MELOs must be entered with a size of at least one round lot, and
any shares of a MELO remaining after an execution that are less than
one round lot would be cancelled.\31\ MELOs may have a minimum quantity
order attribute.\32\ MELOs may not be designated with a time-in-force
of immediate or cancel (``IOC'') and are ineligible for routing.\33\
They also may not have the discretion, reserve size, attribution,
intermarket sweep order, display, or trade now order attributes.\34\
---------------------------------------------------------------------------
\31\ See proposed Nasdaq Rule 4702(b)(14)(B).
\32\ See id.
\33\ See id.; Amendment No. 2 at 11 and 13.
\34\ See Amendment No. 2 at 13-14.
---------------------------------------------------------------------------
Once a MELO becomes eligible to execute by existing unchanged for
the Holding Period, the MELO may only execute against other eligible
MELOs.\35\ MELOs would not execute if there is a resting non-displayed
order priced more aggressively than the NBBO midpoint, and they instead
would be held until the resting non-displayed order is no longer on the
Nasdaq book or the NBBO midpoint matches the price of the resting non-
displayed order.\36\ MELO executions would be reported to Securities
Information Processors and provided in Nasdaq's proprietary data feed
without any new or special indication.\37\ The Exchange would, however,
publish delayed weekly aggregated statistics, as well as delayed
monthly aggregated block-sized trading statistics, for MELO
executions.\38\ Specifically, the Exchange would publish on
Nasdaqtrader.com weekly aggregated statistics showing the number of
shares and transactions of MELOs executed on Nasdaq by security.\39\
This information would be published with a two-week delay for NMS
stocks in Tier 1 of the LULD Plan, and a four-week delay for all other
NMS stocks.\40\ The Exchange also would publish on Nasdaqtrader.com
monthly aggregated block-sized trading statistics of total shares and
total transactions of MELOs executed on Nasdaq.\41\ This information
would be published no earlier than one month following the end of the
month for which trading was aggregated.\42\ Under the proposal, a
transaction would be considered ``block-sized'' if it meets any of the
following criteria: (1) 10,000 or more shares; (2) $200,000 or more in
value; (3) 10,000 or more shares and $200,000 or more in value; (4)
2,000 to 9,999 shares; (5) $100,000 to $199,999 in value; or (6) 2,000
to 9,999 shares and $100,000 to $199,999 in value.\43\
---------------------------------------------------------------------------
\35\ See proposed Nasdaq Rule 4702(b)(14)(A).
\36\ See id.; Amendment No. 2 at 9.
\37\ See Amendment No. 2 at 15.
\38\ See proposed Nasdaq Rule 4702(b)(14)(A); Amendment No. 3 at
3-6.
\39\ See proposed Nasdaq Rule 4702(b)(14)(A).
\40\ See id.
\41\ See id.
\42\ See id.
\43\ See id.
---------------------------------------------------------------------------
As proposed, MELOs would be subject to real-time surveillance to
determine if the order type is being abused by market participants.\44\
In addition, the Exchange intends to implement a process, at the same
time as the implementation of MELOs, to monitor the use of MELOs with
the intent to apply additional measures, as necessary, to ensure their
usage is appropriately tied to the intent of the order type.\45\ The
Exchange stated that this process may include metrics tied to
participant behavior, such as the percentage of MELOs that are
cancelled prior to the completion of the Holding Period, the average
duration of MELOs, and the percentage of MELOs where the NBBO midpoint
is within the limit price when received.\46\ The Exchange stated that
it is committed to determining whether there is opportunity or
prevalence of behavior that is inconsistent with normal risk management
behavior.\47\ According to the Exchange, manipulative abuse is subject
to potential disciplinary action under the Exchange's rules, and other
behavior that is not necessarily manipulative but nonetheless
frustrates the purposes of the MELO order type may be subject to
penalties or other participant requirements to discourage such
behavior, should it occur.\48\
---------------------------------------------------------------------------
\44\ See Amendment No. 2 at 22.
\45\ See id.
\46\ See id.
\47\ See id. at 22-23.
\48\ See id. at 23.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment Nos. 1, 2, and 3, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\49\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\50\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and that the rules are not designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers; and Section 6(b)(8) of the Act,\51\ which requires that the
rules of a national securities exchange not impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
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\49\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\50\ 15 U.S.C. 78f(b)(5).
\51\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission has carefully considered the MELO order type and
finds that it is consistent with the Act. The Commission believes that
the MELO order type could create
[[Page 10939]]
additional and more efficient trading opportunities on the Exchange for
investors with longer investment time horizons, including institutional
investors, and provide these investors with an ability to limit the
information leakage and the market impact that could result from their
orders.
As noted above, the Commission received four comment letters on the
proposed rule change.\52\ One commenter supported the proposed rule
change, stating that MELOs could provide a valuable tool for investors
(particularly institutional investors) seeking to execute in large size
to effectively implement their investment strategies on an exchange and
could attract longer-term market participants to Nasdaq.\53\ This
commenter also stated the benefits to investors of trading MELOs on an
exchange as compared to off-exchange trading venues.\54\ In particular,
the commenter noted that trading on an exchange is open to all
participants, and is a far fairer, more transparent way for markets to
operate in contrast to off-exchange trading venues.\55\
---------------------------------------------------------------------------
\52\ See supra notes 7 and 11.
\53\ See Clearpool Letter at 1-3.
\54\ See id. at 2.
\55\ See id.
---------------------------------------------------------------------------
Two commenters expressed the concern that MELOs would create a
separate order book within the Nasdaq matching system where only MELOs
could interact with each other.\56\ One of these commenters stated that
the proposal represents an unprecedented level of exchange-based order
flow segmentation.\57\ This commenter acknowledged the existence of
limited exchange-based mechanisms that have the effect of restricting
some order flow interaction, but contended that the proposal goes
significantly beyond any such existing restrictions.\58\ The other
commenter also asserted that artificially introducing latency
negatively impacts the price discovery and formation functions of the
Exchange.\59\
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\56\ See Citadel Letter at 1-3; FIA PTG Letter at 2.
\57\ See Citadel Letter at 1. This commenter noted that the
proposal would result in two orders on the Exchange failing to
interact when one order is a MELO and the other order is not. See
id. at 3.
\58\ See id.
\59\ See FIA PTG Letter at 2.
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In addition, one commenter remarked that market participants with
marketable held orders or resting orders seeking to execute against
marketable held order flow would be unlikely to utilize MELOs because
marketable held orders are typically required to be executed fully and
promptly.\60\ According to the commenter, as use of the MELO order book
increases, liquidity in the non-MELO order book could be negatively
impacted to the detriment of retail investors.\61\ In addition, the
commenter stated that investors submitting resting MELOs would not be
able to interact with marketable held order flow.\62\ The commenter
suggested that the Exchange could partially mitigate the negative
impacts of MELO order segmentation by revising its proposal to allow
any order to immediately interact with a resting MELO as long as it is
priced beyond the midpoint.\63\
---------------------------------------------------------------------------
\60\ See Citadel Letter at 1-2.
\61\ See id. at 2.
\62\ See id.
\63\ See id.
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In contrast, one commenter stated that allowing MELOs to interact
with non-MELOs would defeat the purpose of the MELO order type.\64\
This commenter also stated that it does not believe that the proposal
would negatively impact liquidity or price discovery on the Nasdaq
market because the MELO order type should have little to no detrimental
effect on participants using other order types.\65\ According to this
commenter, to the extent that the MELO order type would provide
incentives for order flow to be directed to a fair access exchange and
away from private market centers, price discovery for the broader
markets might improve.\66\
---------------------------------------------------------------------------
\64\ See Clearpool Letter at 3.
\65\ See id.
\66\ See id.
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The Exchange responded to these comments in Amendment No. 2, and
stated that although MELOs may forgo the opportunity to interact with
other liquidity on the Exchange, MELO users will have accepted this
possibility in return for the ability to interact with other market
participants with the same time horizon.\67\ The Exchange also compared
MELOs to the minimum quantity order attribute, as well as the retail
price improving orders available on Nasdaq BX, Inc.\68\ The Exchange
stated that both of these types of orders provide the opportunity to
interact with orders meeting certain characteristics, and consequently
may miss the opportunity to receive an execution if the contra-side
order does not meet the specified characteristics.\69\ The Exchange
also stated that it is not unfair or discriminatory that non-displayed
orders resting on Nasdaq that are priced more aggressively than the
NBBO midpoint would not participate in MELO executions.\70\ According
to the Exchange, the use of resting non-displayed orders and MELOs
would be available to all Exchange participants, who need to evaluate
which order type best serves their investment needs.\71\ The Exchange
also noted that it conducted a pro forma study of the effect of
applying MELOs to the current market by reviewing all executions
occurring on Nasdaq in August 2017, and found that only 0.37% of
resting non-displayed orders traded at a price better than the
prevailing midpoint at the time of execution.\72\ According to the
Exchange, consequently, the number of situations in which a participant
would have to consider the trade-offs between posting a non-displayed
buy (sell) order at a higher (lower) price as compared to submitting a
MELO is minimal.\73\ In addition, the Exchange reiterated that all
members may use MELOs and thus have access to MELO liquidity.\74\
Finally, the Exchange amended the proposal to provide that MELOs would
not execute if there is a resting non-displayed order priced more
aggressively than the NBBO midpoint; rather, MELOs would be held until
the resting non-displayed order is no longer on the Nasdaq book or the
NBBO midpoint matches the price of the resting non-displayed order.\75\
---------------------------------------------------------------------------
\67\ See Amendment No. 2 at 19.
\68\ See id.
\69\ See id.
\70\ See id. at 20.
\71\ See id.
\72\ See id. at 21.
\73\ See id.
\74\ See id.
\75\ See id. at 9; proposed Nasdaq Rule 4702(b)(14)(A).
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The Commission believes that the proposed MELO order type is
reasonably designed to enhance midpoint execution quality on the
Exchange. The Commission notes that the concept of exchange order types
or attributes that permit market participants to elect not to execute
against certain contra-side interest is not novel. Existing order
functionalities, such as the minimum quantity and post-only conditions,
enable market participants to direct their orders to execute only if
certain conditions are met by contra-side order flow. The Commission
also notes that the Holding Period introduced by the Exchange's
proposal is specific to MELOs and thus does not introduce latency with
respect to any other type of trading interest on the Exchange.
Moreover, as noted above, the MELO order type (including its Holding
Period) could create additional and more efficient trading
opportunities on the Exchange for investors with longer investment time
horizons. In addition, the Commission notes that, unlike a scenario in
which orders are directed among multiple separate trading venues where
price priority might not be available among the orders,
[[Page 10940]]
the Exchange's proposal would ensure that a MELO does not execute at a
price that is inferior to the price of a resting non-displayed order
(i.e., a resting order priced more aggressively than the NBBO
midpoint). Finally, the Commission notes that all Nasdaq members may
utilize MELOs if they so choose. Accordingly, the Commission believes
that the Exchange's proposal represents a reasonable effort to enhance
the ability of longer-term trading interest to participate effectively
on an exchange, without discriminating unfairly against other market
participants or inappropriately or unnecessarily burdening competition.
One commenter raised the concern that, under the proposal, MELO
executions would be reported to the Securities Information Processors
and provided on Nasdaq's proprietary data feed in the same manner as
all other transactions on Nasdaq.\76\ This commenter stated that this
approach likely would raise concerns about market fairness and
introduce significant complexity for investors, broker-dealers, and
regulators when attempting to analyze market activity and assess
execution quality.\77\ This commenter noted, by way of example, that
investors may see their orders executed on Nasdaq at worse prices than
other contemporaneous executions on Nasdaq and that, without Nasdaq
labeling MELO executions as such, investors may not know why this has
occurred.\78\ This commenter also asserted that, without labeling MELO
executions differently than other executions on Nasdaq, broker-dealer
routing logic may be influenced by liquidity that is not actually
accessible, and regulators may experience difficulties in accurately
filtering market data when evaluating compliance with regulatory
requirements such as best execution.\79\ This commenter urged the
Commission to require that executions resulting from MELOs be marked as
such on the tape.\80\
---------------------------------------------------------------------------
\76\ See Citadel Letter at 3.
\77\ See id.
\78\ See id.
\79\ See id.
\80\ See id. Alternatively, the commenter suggested that Nasdaq
offer the MELO order type on a separate exchange. See id.
---------------------------------------------------------------------------
By contrast, one commenter stated that it does not believe that the
lack of specific identification of MELOs in trade reports would result
in any difficulties for the markets, or complexity for investors or
other market participants when assessing execution quality.\81\
According to this commenter, MELO users would be provided with
anonymity and confidentiality, which the commenter asserted are
critical tools in preventing potentially predatory counterparties from
determining intention and using that information to generate short-term
profits at the expense of longer-term investors.\82\ In addition, this
commenter stated that exchanges currently offer many order types that
when executed do not indicate exactly which order types were used.\83\
---------------------------------------------------------------------------
\81\ See Clearpool Letter at 2.
\82\ See id.
\83\ See id.
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The Exchange responded to these comments in Amendment No. 2, and
noted that transactions in MELOs would be reported to the Securities
Information Processors and provided in Nasdaq's proprietary data feed
in the same manner as all other transactions occurring on Nasdaq are
done currently (i.e., without any new or special indication that a
transaction is a MELO execution).\84\ According to the Exchange, not
identifying MELO executions in real-time is important to ensuring that
investors are protected from market participants that would otherwise
take advantage of the knowledge of MELO executions and undermine the
usefulness of the order type.\85\ In particular, according to the
Exchange, MELO is designed to increase access to, and participation on,
Nasdaq for investors that are less concerned with the time to
execution, but rather are looking to source liquidity, often in greater
size, at the NBBO midpoint against a counterparty order that has the
same objectives.\86\ The Exchange noted that the proposal is designed
to help ensure that members with MELOs are not disadvantaged by other
order types entered by participants that have the benefit of knowing,
and reacting to, rapid changes in the market.\87\ Moreover, in
Amendment No. 3, the Exchange proposed to publish delayed execution
volume statistics for MELOs. As discussed above, the Exchange proposed
to publish weekly aggregated volume statistics regarding the number of
shares and transactions of MELOs executed on the Exchange by security,
as well as monthly aggregated block-sized trading statistics of total
shares and total transactions of MELOs executed on the Exchange.\88\
The weekly aggregated information would be published on
Nasdaqtrader.com with a two-week delay for NMS stocks in Tier 1 of the
LULD Plan and a four-week delay for all other NMS stocks.\89\ The
monthly aggregated information would be published on Nasdaqtrader.com
no earlier than one month following the end of the month for which
trading was aggregated.\90\
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\84\ See Amendment No. 2 at 25.
\85\ See id.
\86\ See id. at 17.
\87\ See id. at 9.
\88\ See proposed Nasdaq Rule 4702(b)(14)(A).
\89\ See id.
\90\ See id.
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The Commission notes that the proposed MELO order type is intended
to provide additional execution opportunities on the Exchange for
market participants that may not be as sensitive to very short-term
changes in the NBBO and are willing to wait a prescribed period of time
following their order submission to receive a potential execution
against other market participants that have similarly elected to forgo
an immediate execution. In particular, the proposed MELO order type is
intended to mitigate the risk that an opportunistic low-latency trader
will be able to execute against a member's order at a time that is
disadvantageous to the member, such as just prior to a change in the
NBBO. The Commission also believes that the proposal to publish delayed
aggregated statistics for MELO executions is reasonably designed to
provide transparency regarding MELO executions on the Exchange without
undermining the usefulness of the order type by limiting the potential
information leakage and the resulting market impact that could be
associated with non-delayed identification of individual MELO
executions.
One commenter asserted that allowing MELOs to be cancelled at any
time during the Holding Period does not appear to be consistent with
the intended use of the order type.\91\ Instead, according to this
commenter, a MELO should only be permitted to be cancelled after the
Holding Period has expired and the order has been placed in the order
book.\92\ Another commenter expressed concern that high-frequency
traders and algorithms could take advantage of MELOs.\93\ By contrast,
one commenter did not have an issue with providing market participants
the ability to cancel MELOs during the Holding Period.\94\ This
commenter stated that it believes this would be an important feature of
the MELO order type because many firms use algorithms to source
liquidity simultaneously from multiple venues.\95\ According to the
commenter, to the extent that liquidity is found elsewhere than Nasdaq
within the
[[Page 10941]]
Holding Period, it would be critically important that the firm be able
to cancel its orders from Nasdaq and re-allocate those shares to other
venues.\96\ This commenter stated that it does not believe any market
participants would be harmed in such a circumstance.\97\
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\91\ See Citadel Letter at 4.
\92\ See id.
\93\ See Shin Letter.
\94\ See Clearpool Letter at 3.
\95\ See id.
\96\ See id.
\97\ See id.
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In Amendment No. 2, the Exchange responded that MELOs may be
cancelled at any time, including during the Holding Period, to allow
members to effectively manage risk.\98\ The Exchange also acknowledged
that the potential exists for some participants to use MELOs in a way
that conflicts with the stated intention of the order type to allow
longer term investors the opportunity to safely find like-minded
counterparties at the midpoint on Nasdaq.\99\ For this reason, the
Exchange represented that MELOs would be subject to real-time
surveillance to determine if the order type is being abused by market
participants.\100\ The Exchange also stated that it plans to implement
a process, at the same time as the implementation of MELOs, to monitor
the use of MELOs, with the intent to apply additional measures, as
necessary, to ensure that their usage is appropriately tied to the
intent of the order type.\101\ According to the Exchange, this process
may include metrics tied to participant behavior, such as the
percentage of MELOs cancelled prior to completion of the Holding
Period, the average duration of MELOs, and the percentage of MELOs
where the NBBO midpoint is within the limit price when received.\102\
The Exchange stated that manipulative abuse is subject to potential
disciplinary action under the Exchange's rules, and other behavior that
frustrates the purposes of the MELO order type may be subject to
penalties or other requirements to discourage such behavior, should it
occur.\103\
---------------------------------------------------------------------------
\98\ See Amendment No. 2 at 8.
\99\ See id. at 22.
\100\ See id.
\101\ See id.
\102\ See id.
\103\ See id. at 23.
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The Commission believes that the Exchange's proposed measures are
reasonably designed to deter potential improper use of the proposed
MELO order type. In particular, the Commission notes that the Exchange
has represented that it will conduct real-time surveillance to monitor
the use of MELOs and ensure that such usage is appropriately tied to
the intent of the order type.\104\ Moreover, importantly, the Exchange
will measure the metrics noted above that reflect participant behavior
with respect to MELOs, such as the percentage of a participant's MELOs
that are cancelled prior to the completion of the Holding Period.\105\
As the Exchange represented in its filing, the Commission expects the
Exchange to continue to evaluate whether additional measures may be
necessary to ensure that MELOs are used in a manner consistent with the
intended purpose of the order type.\106\
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\104\ See id. at 22-23.
\105\ See id. at 22.
\106\ See id.
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IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 3 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 [email protected]. Please include
File Number SR-NASDAQ-2017-074 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment 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 April 3, 2018.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1, 2, and 3, prior to the
thirtieth day after the date of publication of notice of the filing of
Amendment No. 3 in the Federal Register. As discussed above, in
Amendment No. 3, the Exchange proposed to provide on Nasdaqtrader.com
certain delayed aggregated volume statistics for MELOs executed on the
Exchange. The Commission notes that Amendment No. 3 is designed to
provide transparency regarding MELO executions on the Exchange.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\107\ to approve the proposed rule change, as
modified by Amendment Nos. 1, 2, and 3, on an accelerated basis.
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\107\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\108\ that the proposed rule change (SR-NASDAQ-2017-074), as
modified by Amendment Nos. 1, 2, and 3 be, and hereby is, approved on
an accelerated basis.
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\108\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\109\
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\109\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-04979 Filed 3-12-18; 8:45 am]
BILLING CODE 8011-01-P
