Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Provide New Optional Functionality to Minimum Quantity Orders, 45476-45479 [2018-19376]
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Federal Register / Vol. 83, No. 174 / Friday, September 7, 2018 / Notices
Rydex ETF Trust [File No. 811–21261]
Summary: Applicant seeks an order
declaring that it has ceased to be an
investment company. The applicant has
transferred its assets to Invesco
Exchange Traded Fund Trust (formerly
PowerShares Exchange Traded Fund
Trust), Invesco Exchange-Traded Fund
Trust II (formerly PowerShares
Exchange-Traded Fund Trust II) and
Invesco Exchange-Traded Self-Indexed
Fund Trust (formerly PowerShares
Exchange-Traded Self-Indexed Fund
Trust), and on April 6, 2018 made a
final distribution to its shareholders
based on net asset value. Expenses of
approximately $5,200,938 incurred in
connection with the reorganization were
paid by the applicant’s investment
adviser, the acquiring funds’ investment
adviser, and/or their affiliates.
Filing Dates: The application was
filed on June 19, 2018, and amended on
July 20, 2018 and August 9, 2018.
Applicant’s Address: 702 King Farm
Boulevard, Suite 200, Rockville,
Maryland 20850.
Winton Diversified Opportunities Fund
[File No. 811–23028]
Summary: Applicant, a closed-end
investment company, seeks an order
declaring that it has ceased to be an
investment company. On May 29, 2018,
applicant made a liquidating
distribution to its shareholders based on
net asset value. Expenses of
approximately $79,227 incurred in
connection with the liquidation were
paid by applicant’s investment adviser.
Filing Dates: The application was
filed on July 18, 2018, and amended on
August 10, 2018.
Applicant’s Address: One Freedom
Valley Drive, Oaks, Pennsylvania 19456.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–19377 Filed 9–6–18; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84012; File No. SR–BX–
2018–040]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Provide New Optional
Functionality to Minimum Quantity
Orders
August 31, 2018.
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 August
20, 2018, Nasdaq BX, Inc. (‘‘BX’’ 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 provide
new optional functionality to Minimum
Quantity Orders.
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqbx.cchwallstreet.com/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to provide
a new optional functionality to the
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Minimum Quantity Order Attribute,3
which is identical to the optional
functionality provided by The Nasdaq
Stock Market LLC (‘‘Nasdaq’’).4
Current Functionality
An Order designated with the
Minimum Quantity Order Attribute
(‘‘MQ’’) allows a market participant to
specify a minimum share amount at
which it will execute. For example, a
market participant seeking to buy or sell
a large position may desire to execute
only if a large quantity of shares can be
traded to reduce the price impact of the
security being bought or sold. An Order
with MQ will not execute unless the
volume of contra-side liquidity available
to execute against the order meets or
exceeds the designated minimum. When
an Order with MQ is received by the
Exchange, it will execute immediately 5
if there is sufficient liquidity available
on the Exchange within the limit price
of the Order with MQ. Specifically, the
Order with MQ will execute if the sum
of the shares of one or more resting
Orders is equal to or greater than its
minimum quantity. In the case of
multiple resting Orders being aggregated
to meet the minimum quantity, each
contra-side order creates a separate
execution and thus there can be
multiple executions that, in aggregate,
equal or exceed the minimum quantity.
If an Order with MQ does not execute
immediately due to lack of contra-side
liquidity that is equal to or greater than
the designated minimum, the Order will
post 6 to the Exchange book as a NonDisplayed Order with the characteristics
of its underlying Order Type.7 Once
posted, an Order with MQ will execute
only if an incoming Order is marketable
against the resting Order with MQ and
is equal to or greater than the minimum
quantity set on the resting Order with
MQ. Multiple potential executions
cannot be aggregated to meet the
minimum quantity requirement of the
posted Order with MQ. If an Order with
MQ executes partially and the number
3 Rule
4703(e).
Nasdaq Rule 4703(e); see also Securities
Exchange Act Release No. 73959 (Dec. 30, 2014), 80
FR 582 (Jan. 6, 2015) (SR–NASDAQ–2014–95).
5 An Order with MQ would satisfy the
requirements of Regulation NMS Rule 611 and not
trade through a protected quotation. See 17 CFR
242.611.
6 Orders post to the Exchange book only if they
are designated with a time in force that allows for
posting. For example, an IOC order never posts to
the book.
7 A Non-Displayed Order is an Order Type that
is not displayed to other Participants, but
nevertheless remains available for potential
execution against incoming Orders until executed
in full or cancelled. See Rule 4702(b)(3). Orders
with MQ are always Non-Displayed when posted on
the Exchange book.
4 See
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of shares remaining is less than the
minimum quantity of the Order, the
minimum quantity of the Order is
reduced to the remaining share size. If
an Order with MQ is received that is
marketable against a resting contra-side
Order with size that does not meet the
minimum quantity requirement, the
Order with MQ will be posted on the
Exchange book as a Non-Displayed
Order with the characteristics of its
underlying Order Type.8 For example, if
an Order with MQ is received to buy
1,000 shares at $10 with a minimum
quantity restriction of 500 shares and
there is a resting sell order for 300
shares at $10, the Order with MQ will
be posted as a Non-Displayed Order at
$10. Furthermore, the Exchange notes
that a subsequent Order without a
minimum quantity restriction that is
marketable against the resting contraside interest will result in an execution
because the market participant entering
the Order with MQ has expressed its
intention not to execute against
liquidity below a certain minimum size,
and therefore cedes execution priority to
any new Orders that would otherwise
have a lower priority.
Proposed Functionality
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The Exchange is proposing to add a
new optional functionality to further
enhance the utility of the Minimum
Quantity Order Attribute to market
participants.9 As was noted by Nasdaq
in proposing the optional functionality
proposed herein,10 some market
participants have noted that they avoid
sending large Orders with MQ to the
Exchange out of concern that such
Orders may interact against small
Orders entered by professional traders.
These market participants are concerned
that such interaction may negatively
impact the execution of their larger
Orders. Often institutional Orders are
much larger in size than the average
Order in the marketplace. Furthermore,
in order to facilitate the liquidation or
acquisition of a large position, multiple
Orders are submitted into the market,
which although larger than the average
Order in the market, only represent a
small proportion of the overall
institutional position to be executed.
The various strategies used to execute
large size are based on a desire to limit
8 SEC Rule 610(d) under Regulation NMS restricts
displayed quotations that lock or cross protected
quotations in NMS stock, but does not apply to nondisplayed trading interest, like a resting Order with
MQ. See 17 CFR 242.610(d).
9 The option is available at the port level.
Accordingly, all Orders entered through a particular
port will receive the selected functionality. All
trading ports default to the current functionality.
10 See note 4, supra.
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price movement of the stock the
institution is pursuing. Executing in
small sizes, even if in aggregate it meets
a minimum quantity designation, may
impact the market such that the
additional Orders that the institution
has yet to submit to the market may be
more costly to execute. If an institution
is able to execute in larger sizes, the
contra-party to the execution is less
likely to be a participant that reacts to
short term changes in the stock price
and as such the price impact to the
stock could be less acute when larger
individual executions are obtained by
the institution.11 As a consequence of
this concern, these Orders are often
executed away from the Exchange in
dark pools, at least some of which have
the functionality proposed herein,12 or
via broker-dealer internalization.
Accordingly, to attract larger Orders
with MQ to the Exchange, it is
proposing new optional functionality
that will allow a market participant to
designate a minimum individual
execution size, and thus allow users to
avoid interaction with such smaller
Orders resting on the book. As
discussed above, under the current rule,
an incoming Order with MQ will
execute against any number of smaller
contra-side Orders that, in aggregate,
meet the minimum quantity set by the
market participant. For example, if a
market participant entered an Order
with MQ to buy with a price of $10, a
size of 1,000 and a minimum quantity
of 500, and the order was marketable
against two resting sell orders for 300
and 400 shares, the System would
aggregate both orders for purposes of
meeting the minimum quantity, thus
resulting in executions of 300 shares
and 400 shares respectively with the
remaining 300 shares of the Order with
MQ posting to the Exchange book with
a minimum quantity restriction of 300
shares. The proposed new optional
functionality will not allow aggregation
of smaller executions to satisfy the
11 The Commission has long recognized this
concern: ‘‘Another type of implicit transaction cost
reflected in the price of a security is short-term
price volatility caused by temporary imbalances in
trading interest. For example, a significant implicit
cost for large investors (who often represent the
consolidated investments of many individuals) is
the price impact that their large trades can have on
the market. Indeed, disclosure of these large orders
can reduce the likelihood of their being filled.’’ See
Securities Exchange Act Release No. 42450 (Feb. 23,
2000), 65 FR 10577, 10581 (Feb. 28, 2000) (SR–
NYSE–99–48) (emphasis added) (internal citation
omitted).
12 For example, the BIDS Alternative Trading
System also has functionality that allows its
subscribers to select a minimum size requirement,
which prevents a subscriber’s interest from
interacting with contra-side interest if its size is less
than the specified minimum. See https://
www.bidstrading.com/solutions/faqs/.
PO 00000
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minimum quantity of an incoming
Order with MQ. Using the same
scenario as above, but with the
proposed new functionality and a
minimum execution size requirement of
400 shares selected by the market
participant, the Order with MQ would
not execute against the two sell orders
because the order at the top of the
Exchange book is less than 400 shares.
The new functionality will reprice the
Order with MQ to one minimum price
increment lower than (higher than) the
lowest price (highest price) of the
resting contra-side Order, and post the
Order to the Exchange book as a NonDisplayed Order when the top of the
Exchange book is of insufficient size to
satisfy the minimum execution size
requirement. Applied to the example
above, the Order would post to the
Exchange book as a Non-Displayed
Order to buy 1,000 shares at $9.99. The
Exchange notes that the market
participant entering the Order with MQ
has expressed its intention not to
execute against liquidity below a certain
minimum size, and therefore cedes
execution priority when it would lock
or cross resting Orders against which it
would otherwise execute if it were not
for the minimum execution size
restriction.
The Exchange believes that it is
appropriate to adjust the price one
minimum price increment lower than
(higher than) the lowest price (highest
price) of the resting contra-side Order
prior to posting on the Exchange book
because, by using the minimum
execution size option, the submitter of
the Order is choosing to reduce the
number of situations in which the Order
could potentially execute. Thus, an
Order without this further restriction
provides greater contribution to the
price discovery process of the market.
All bona fide market participation that
results in an execution on a data feed
contributes to the price discovery
process that is essential to a proper
functioning market. However, there are
different degrees to which activity
within the market contributes to price
discovery. A displayed Order at the
NBBO of an Exchange, and the
subsequent execution thereof,
contributes significantly to price
discovery because both the Displayed
Order prior to execution, and the
execution itself, provide a reference
price to the market. Further, a nondisplayed order on an exchange
contributes to price discovery as it is
part of the continuous auction on a
market with publicly displayed orders
and quotes—albeit the contribution of a
non-displayed order on an exchange is
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less than the contribution of a displayed
order on an exchange. Furthermore, a
non-displayed order on a dark pool
contributes less to price discovery
because it is resting in a less transparent
trading venue that is not part of the
continuous auction of a lit exchange. If
one were to rank the contribution to
price discovery that different market
activity provides, it would include the
following (listed from least price
discovery contribution to most):
D Order resting in dark pool (no
contribution)
D Non-displayed order on exchange (no
or very little contribution)
D Order execution in dark pool (some
contribution, execution reported
publicly via TRF)
D Non-displayed order execution on
exchange (contribution as part of
continuous auction, execution
reported publicly, and priority is
behind displayed—i.e., priority is
ceded to orders that contribute more
to price discovery)
D Displayed order on exchange
(significant contribution)
D Displayed order execution on
exchange (significant contribution,
publicly displayed order + execution
reported publicly)
In this sense, the proposed change
continues to contribute more
meaningfully to price discovery than an
order in a dark pool because it is part
of the continuous auction market on the
exchange but, similar to a regular NonDisplayed Order ceding priority to
Displayed Orders on the Exchange, the
Order with MQ that uses the proposed
functionality will cede price priority to
Orders that do not contain the minimum
execution size restriction. Also unlike
the current process, the proposed new
functionality will cancel the remainder
of a marketable Order with MQ that is
partially filled upon entry if the
partially-executed Order with MQ
would lock or cross resting contra-side
liquidity that does not meet the
minimum execution size requirement.
Under the current process, an Order
with MQ that receives a partial
execution has the remainder of the
Order posted to the Exchange book as a
Non-Displayed Order. The proposed
new functionality will, instead, cancel
any shares not executed after a partial
execution of an Order with MQ if there
are more shares that remain resting on
the Exchange book at a price that would
satisfy the limit price of the Order with
MQ but that are not executable against
the incoming Order with MQ due to the
minimum execution size set on the
Order. For example, an Order with MQ
to buy priced at $10 with a size of 1,000
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and a minimum quantity of 500, that is
marketable against two sell orders on
the Exchange book, one for 500 shares
and one for 400 shares, would result in
the execution of 500 shares and the
cancellation of the remaining 500
shares. Under the current process, the
Order would receive two partial
executions of 500 and 400 shares, and
the remaining 100 shares would be
posted to the Exchange book as a NonDisplayed Order to buy priced at $10.
The Exchange notes that when a nonIOC Order with MQ is partially
executed and cancelled in this situation,
the contra-side liquidity that is not
executed may be Non-Displayed. If an
Order with MQ is cancelled due to NonDisplayed contra-side liquidity, the
submitter of the Order will know that
there may be a resting Order or Orders
at the price of the Order with MQ and
also that the resting Order or Orders are
for fewer shares than the minimum
execution size required by the Order.
The Exchange believes this is acceptable
because the Order with MQ has already
partially executed for a size of at least
one round lot and thus the Order
submitter has taken on risk due to the
execution and therefore contributed to
price discovery in the market place.
Under the proposed change, a resting
Order with MQ will operate the same
way as it does currently. When an Order
with MQ is posted on the book, it will
only execute against incoming Orders if
the individual incoming Order is equal
to or greater than the minimum
designated on the Order. The primary
difference between the current
functionality and the proposed new
functionality is that upon receipt, an
incoming Order with MQ will only
execute against individual resting
Orders if the order at the top of the
Exchange book meets or exceeds the
minimum on the Order. The Exchange
notes that this is no different than
Nasdaq’s Minimum Quantity Order
Attribute, on which the proposed
change is based, and is also similar to
Cboe BZX Exchange, Inc.’s (‘‘BZX’’)
Minimum Quantity Order,13 which
allows BZX Users to specify that such
an order will not execute against
multiple aggregated orders
simultaneously and that the minimum
quantity condition be satisfied by each
individual order resting on the BZX
book.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,14 in general, and furthers the
objectives of Section 6(b)(5) of the Act,15
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. The
proposal will provide market
participants, including institutional
firms that ultimately represent
individual retail investors in many
cases, with better control over their
Orders, thereby providing them with
greater potential to improve the quality
of their Order executions. Currently, the
rule allows the market participant to
designate a minimum quantity on an
Order that, upon entry, may aggregate
multiple executions to meet the
minimum quantity requirement. Once
posted to the Exchange book, however,
the minimum quantity requirement is
equivalent to a minimum execution size
requirement. The Exchange is now
proposing to provide a market
participant with control over the
execution of their Order with MQ by
allowing them an option to designate
the minimum individual execution size
upon entry. The control offered by the
proposed change is consistent with the
various types of control currently
provided by exchange order types. For
example, the Exchange, Nasdaq and
other exchanges offer limit orders,
which allow a market participant
control over the price it will pay or
receive for a stock.16 Similarly,
exchanges offer order types that allow
market participants to structure their
trading activity in a manner that is more
likely avoid certain transaction cost
related economic outcomes.17 Moreover,
and as discussed above, other trading
venues provide the very functionality
that the Exchange is proposing, with the
proposed rule text and operation of the
functionality identical to that of Nasdaq.
As discussed above, some market
participants have requested the
functionality proposed herein so they
may avoid transacting with smaller
Orders that they believe ultimately
increase the cost of the transaction.
Market participants, such as large
institutions that transact a large number
of orders on behalf of retail investors,
have noted that because the Exchange
does not have this functionality, they
avoid sending large orders to the
Exchange to avoid potentially more
15 15
U.S.C. 78f(b)(5).
e.g., Rule 4703(c).
17 See, for example, the Exchange’s Post-Only
Order. See Rule 4702(b)(4).
16 See,
13 See
14 15
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BZX Rule 11.9(c)(5).
U.S.C. 78f(b).
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expensive transactions.18 In this regard,
the Exchange notes that proposed new
optional functionality may improve the
Exchange market by attracting more
Order flow, which is currently trading
on less transparent venues that
contribute less to price discovery and
price competition than executions and
quotes that occur on lit exchanges. Such
new Order flow will further enhance the
depth and liquidity on the Exchange,
which supports just and equitable
principles of trade. Furthermore, the
proposed modification to the Minimum
Quantity Order Attribute is consistent
with providing market participants with
greater control over the nature of their
executions so that they may achieve
their trading goals and improve the
quality of their executions.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Specifically, the proposed change
allows market participants to condition
the processing of their Orders based on
a minimum execution size. The changes
to the Minimum Quantity Order
Attribute will enhance the functionality
offered by the Exchange to its members,
thereby promoting its competitiveness
with other exchanges and non-exchange
trading venues that already offer the
same or similar functionality. As a
consequence, the proposed change will
promote competition among exchanges
and their peers, which, in turn, will
decrease the burden on competition
rather than place an unnecessary burden
thereon.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
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No written comments were either
solicited or received.
18 As noted, the proposal is designed to attract
liquidity to the Exchange by allowing market
participants to designate a minimum size of contraside Order with which to interact, thus providing
market participants with functionality that is
otherwise available to them on another exchange
(i.e., Nasdaq). The designation of a minimum size
may reduce the interaction that such new Order
flow would have with smaller contra-side Orders on
the Exchange, some of which may be retail Order
flow. The Exchange notes that since the Order flow
attracted by this functionality may also represent
retail investors and is in addition to the existing
Order flow currently on the Exchange, market
quality for retail investors ultimately should not be
negatively impacted. Accordingly, the Exchange
does not believe that retail Orders will be
disadvantaged by the proposed change.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 19 and Rule 19b–
4(f)(6) thereunder.20
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2018–040 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–BX–2018–040. 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/
19 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
20 17
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45479
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–BX–2018–040 and should
be submitted on or before September 28,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–19376 Filed 9–6–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84013; File No. SR–BX–
2018–025]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Designation of a
Longer Period for Commission Action
on Proposed Rule Change To Make
Permanent the Exchange’s Retail Price
Improvement Program, Which is Set To
Expire on December 31, 2018
August 31, 2018.
On July 9, 2018, Nasdaq BX, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to make permanent the
Exchange’s Retail Price Improvement
Program. The proposed rule change was
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 83, Number 174 (Friday, September 7, 2018)]
[Notices]
[Pages 45476-45479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19376]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84012; File No. SR-BX-2018-040]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Provide New
Optional Functionality to Minimum Quantity Orders
August 31, 2018.
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 August 20, 2018, Nasdaq BX, Inc. (``BX'' 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to provide new optional functionality to
Minimum Quantity Orders.
The text of the proposed rule change is available on the Exchange's
website at https://nasdaqbx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to provide a new optional functionality
to the Minimum Quantity Order Attribute,\3\ which is identical to the
optional functionality provided by The Nasdaq Stock Market LLC
(``Nasdaq'').\4\
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\3\ Rule 4703(e).
\4\ See Nasdaq Rule 4703(e); see also Securities Exchange Act
Release No. 73959 (Dec. 30, 2014), 80 FR 582 (Jan. 6, 2015) (SR-
NASDAQ-2014-95).
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Current Functionality
An Order designated with the Minimum Quantity Order Attribute
(``MQ'') allows a market participant to specify a minimum share amount
at which it will execute. For example, a market participant seeking to
buy or sell a large position may desire to execute only if a large
quantity of shares can be traded to reduce the price impact of the
security being bought or sold. An Order with MQ will not execute unless
the volume of contra-side liquidity available to execute against the
order meets or exceeds the designated minimum. When an Order with MQ is
received by the Exchange, it will execute immediately \5\ if there is
sufficient liquidity available on the Exchange within the limit price
of the Order with MQ. Specifically, the Order with MQ will execute if
the sum of the shares of one or more resting Orders is equal to or
greater than its minimum quantity. In the case of multiple resting
Orders being aggregated to meet the minimum quantity, each contra-side
order creates a separate execution and thus there can be multiple
executions that, in aggregate, equal or exceed the minimum quantity. If
an Order with MQ does not execute immediately due to lack of contra-
side liquidity that is equal to or greater than the designated minimum,
the Order will post \6\ to the Exchange book as a Non-Displayed Order
with the characteristics of its underlying Order Type.\7\ Once posted,
an Order with MQ will execute only if an incoming Order is marketable
against the resting Order with MQ and is equal to or greater than the
minimum quantity set on the resting Order with MQ. Multiple potential
executions cannot be aggregated to meet the minimum quantity
requirement of the posted Order with MQ. If an Order with MQ executes
partially and the number
[[Page 45477]]
of shares remaining is less than the minimum quantity of the Order, the
minimum quantity of the Order is reduced to the remaining share size.
If an Order with MQ is received that is marketable against a resting
contra-side Order with size that does not meet the minimum quantity
requirement, the Order with MQ will be posted on the Exchange book as a
Non-Displayed Order with the characteristics of its underlying Order
Type.\8\ For example, if an Order with MQ is received to buy 1,000
shares at $10 with a minimum quantity restriction of 500 shares and
there is a resting sell order for 300 shares at $10, the Order with MQ
will be posted as a Non-Displayed Order at $10. Furthermore, the
Exchange notes that a subsequent Order without a minimum quantity
restriction that is marketable against the resting contra-side interest
will result in an execution because the market participant entering the
Order with MQ has expressed its intention not to execute against
liquidity below a certain minimum size, and therefore cedes execution
priority to any new Orders that would otherwise have a lower priority.
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\5\ An Order with MQ would satisfy the requirements of
Regulation NMS Rule 611 and not trade through a protected quotation.
See 17 CFR 242.611.
\6\ Orders post to the Exchange book only if they are designated
with a time in force that allows for posting. For example, an IOC
order never posts to the book.
\7\ A Non-Displayed Order is an Order Type that is not displayed
to other Participants, but nevertheless remains available for
potential execution against incoming Orders until executed in full
or cancelled. See Rule 4702(b)(3). Orders with MQ are always Non-
Displayed when posted on the Exchange book.
\8\ SEC Rule 610(d) under Regulation NMS restricts displayed
quotations that lock or cross protected quotations in NMS stock, but
does not apply to non-displayed trading interest, like a resting
Order with MQ. See 17 CFR 242.610(d).
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Proposed Functionality
The Exchange is proposing to add a new optional functionality to
further enhance the utility of the Minimum Quantity Order Attribute to
market participants.\9\ As was noted by Nasdaq in proposing the
optional functionality proposed herein,\10\ some market participants
have noted that they avoid sending large Orders with MQ to the Exchange
out of concern that such Orders may interact against small Orders
entered by professional traders. These market participants are
concerned that such interaction may negatively impact the execution of
their larger Orders. Often institutional Orders are much larger in size
than the average Order in the marketplace. Furthermore, in order to
facilitate the liquidation or acquisition of a large position, multiple
Orders are submitted into the market, which although larger than the
average Order in the market, only represent a small proportion of the
overall institutional position to be executed. The various strategies
used to execute large size are based on a desire to limit price
movement of the stock the institution is pursuing. Executing in small
sizes, even if in aggregate it meets a minimum quantity designation,
may impact the market such that the additional Orders that the
institution has yet to submit to the market may be more costly to
execute. If an institution is able to execute in larger sizes, the
contra-party to the execution is less likely to be a participant that
reacts to short term changes in the stock price and as such the price
impact to the stock could be less acute when larger individual
executions are obtained by the institution.\11\ As a consequence of
this concern, these Orders are often executed away from the Exchange in
dark pools, at least some of which have the functionality proposed
herein,\12\ or via broker-dealer internalization.
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\9\ The option is available at the port level. Accordingly, all
Orders entered through a particular port will receive the selected
functionality. All trading ports default to the current
functionality.
\10\ See note 4, supra.
\11\ The Commission has long recognized this concern: ``Another
type of implicit transaction cost reflected in the price of a
security is short-term price volatility caused by temporary
imbalances in trading interest. For example, a significant implicit
cost for large investors (who often represent the consolidated
investments of many individuals) is the price impact that their
large trades can have on the market. Indeed, disclosure of these
large orders can reduce the likelihood of their being filled.'' See
Securities Exchange Act Release No. 42450 (Feb. 23, 2000), 65 FR
10577, 10581 (Feb. 28, 2000) (SR-NYSE-99-48) (emphasis added)
(internal citation omitted).
\12\ For example, the BIDS Alternative Trading System also has
functionality that allows its subscribers to select a minimum size
requirement, which prevents a subscriber's interest from interacting
with contra-side interest if its size is less than the specified
minimum. See https://www.bidstrading.com/solutions/faqs/.
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Accordingly, to attract larger Orders with MQ to the Exchange, it
is proposing new optional functionality that will allow a market
participant to designate a minimum individual execution size, and thus
allow users to avoid interaction with such smaller Orders resting on
the book. As discussed above, under the current rule, an incoming Order
with MQ will execute against any number of smaller contra-side Orders
that, in aggregate, meet the minimum quantity set by the market
participant. For example, if a market participant entered an Order with
MQ to buy with a price of $10, a size of 1,000 and a minimum quantity
of 500, and the order was marketable against two resting sell orders
for 300 and 400 shares, the System would aggregate both orders for
purposes of meeting the minimum quantity, thus resulting in executions
of 300 shares and 400 shares respectively with the remaining 300 shares
of the Order with MQ posting to the Exchange book with a minimum
quantity restriction of 300 shares. The proposed new optional
functionality will not allow aggregation of smaller executions to
satisfy the minimum quantity of an incoming Order with MQ. Using the
same scenario as above, but with the proposed new functionality and a
minimum execution size requirement of 400 shares selected by the market
participant, the Order with MQ would not execute against the two sell
orders because the order at the top of the Exchange book is less than
400 shares. The new functionality will reprice the Order with MQ to one
minimum price increment lower than (higher than) the lowest price
(highest price) of the resting contra-side Order, and post the Order to
the Exchange book as a Non-Displayed Order when the top of the Exchange
book is of insufficient size to satisfy the minimum execution size
requirement. Applied to the example above, the Order would post to the
Exchange book as a Non-Displayed Order to buy 1,000 shares at $9.99.
The Exchange notes that the market participant entering the Order with
MQ has expressed its intention not to execute against liquidity below a
certain minimum size, and therefore cedes execution priority when it
would lock or cross resting Orders against which it would otherwise
execute if it were not for the minimum execution size restriction.
The Exchange believes that it is appropriate to adjust the price
one minimum price increment lower than (higher than) the lowest price
(highest price) of the resting contra-side Order prior to posting on
the Exchange book because, by using the minimum execution size option,
the submitter of the Order is choosing to reduce the number of
situations in which the Order could potentially execute. Thus, an Order
without this further restriction provides greater contribution to the
price discovery process of the market. All bona fide market
participation that results in an execution on a data feed contributes
to the price discovery process that is essential to a proper
functioning market. However, there are different degrees to which
activity within the market contributes to price discovery. A displayed
Order at the NBBO of an Exchange, and the subsequent execution thereof,
contributes significantly to price discovery because both the Displayed
Order prior to execution, and the execution itself, provide a reference
price to the market. Further, a non-displayed order on an exchange
contributes to price discovery as it is part of the continuous auction
on a market with publicly displayed orders and quotes--albeit the
contribution of a non-displayed order on an exchange is
[[Page 45478]]
less than the contribution of a displayed order on an exchange.
Furthermore, a non-displayed order on a dark pool contributes less to
price discovery because it is resting in a less transparent trading
venue that is not part of the continuous auction of a lit exchange. If
one were to rank the contribution to price discovery that different
market activity provides, it would include the following (listed from
least price discovery contribution to most):
[ssquf] Order resting in dark pool (no contribution)
[ssquf] Non-displayed order on exchange (no or very little
contribution)
[ssquf] Order execution in dark pool (some contribution, execution
reported publicly via TRF)
[ssquf] Non-displayed order execution on exchange (contribution as part
of continuous auction, execution reported publicly, and priority is
behind displayed--i.e., priority is ceded to orders that contribute
more to price discovery)
[ssquf] Displayed order on exchange (significant contribution)
[ssquf] Displayed order execution on exchange (significant
contribution, publicly displayed order + execution reported publicly)
In this sense, the proposed change continues to contribute more
meaningfully to price discovery than an order in a dark pool because it
is part of the continuous auction market on the exchange but, similar
to a regular Non-Displayed Order ceding priority to Displayed Orders on
the Exchange, the Order with MQ that uses the proposed functionality
will cede price priority to Orders that do not contain the minimum
execution size restriction. Also unlike the current process, the
proposed new functionality will cancel the remainder of a marketable
Order with MQ that is partially filled upon entry if the partially-
executed Order with MQ would lock or cross resting contra-side
liquidity that does not meet the minimum execution size requirement.
Under the current process, an Order with MQ that receives a partial
execution has the remainder of the Order posted to the Exchange book as
a Non-Displayed Order. The proposed new functionality will, instead,
cancel any shares not executed after a partial execution of an Order
with MQ if there are more shares that remain resting on the Exchange
book at a price that would satisfy the limit price of the Order with MQ
but that are not executable against the incoming Order with MQ due to
the minimum execution size set on the Order. For example, an Order with
MQ to buy priced at $10 with a size of 1,000 and a minimum quantity of
500, that is marketable against two sell orders on the Exchange book,
one for 500 shares and one for 400 shares, would result in the
execution of 500 shares and the cancellation of the remaining 500
shares. Under the current process, the Order would receive two partial
executions of 500 and 400 shares, and the remaining 100 shares would be
posted to the Exchange book as a Non-Displayed Order to buy priced at
$10.
The Exchange notes that when a non-IOC Order with MQ is partially
executed and cancelled in this situation, the contra-side liquidity
that is not executed may be Non-Displayed. If an Order with MQ is
cancelled due to Non-Displayed contra-side liquidity, the submitter of
the Order will know that there may be a resting Order or Orders at the
price of the Order with MQ and also that the resting Order or Orders
are for fewer shares than the minimum execution size required by the
Order. The Exchange believes this is acceptable because the Order with
MQ has already partially executed for a size of at least one round lot
and thus the Order submitter has taken on risk due to the execution and
therefore contributed to price discovery in the market place.
Under the proposed change, a resting Order with MQ will operate the
same way as it does currently. When an Order with MQ is posted on the
book, it will only execute against incoming Orders if the individual
incoming Order is equal to or greater than the minimum designated on
the Order. The primary difference between the current functionality and
the proposed new functionality is that upon receipt, an incoming Order
with MQ will only execute against individual resting Orders if the
order at the top of the Exchange book meets or exceeds the minimum on
the Order. The Exchange notes that this is no different than Nasdaq's
Minimum Quantity Order Attribute, on which the proposed change is
based, and is also similar to Cboe BZX Exchange, Inc.'s (``BZX'')
Minimum Quantity Order,\13\ which allows BZX Users to specify that such
an order will not execute against multiple aggregated orders
simultaneously and that the minimum quantity condition be satisfied by
each individual order resting on the BZX book.
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\13\ See BZX Rule 11.9(c)(5).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\14\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\15\ 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. The proposal will provide market participants, including
institutional firms that ultimately represent individual retail
investors in many cases, with better control over their Orders, thereby
providing them with greater potential to improve the quality of their
Order executions. Currently, the rule allows the market participant to
designate a minimum quantity on an Order that, upon entry, may
aggregate multiple executions to meet the minimum quantity requirement.
Once posted to the Exchange book, however, the minimum quantity
requirement is equivalent to a minimum execution size requirement. The
Exchange is now proposing to provide a market participant with control
over the execution of their Order with MQ by allowing them an option to
designate the minimum individual execution size upon entry. The control
offered by the proposed change is consistent with the various types of
control currently provided by exchange order types. For example, the
Exchange, Nasdaq and other exchanges offer limit orders, which allow a
market participant control over the price it will pay or receive for a
stock.\16\ Similarly, exchanges offer order types that allow market
participants to structure their trading activity in a manner that is
more likely avoid certain transaction cost related economic
outcomes.\17\ Moreover, and as discussed above, other trading venues
provide the very functionality that the Exchange is proposing, with the
proposed rule text and operation of the functionality identical to that
of Nasdaq.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ See, e.g., Rule 4703(c).
\17\ See, for example, the Exchange's Post-Only Order. See Rule
4702(b)(4).
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As discussed above, some market participants have requested the
functionality proposed herein so they may avoid transacting with
smaller Orders that they believe ultimately increase the cost of the
transaction. Market participants, such as large institutions that
transact a large number of orders on behalf of retail investors, have
noted that because the Exchange does not have this functionality, they
avoid sending large orders to the Exchange to avoid potentially more
[[Page 45479]]
expensive transactions.\18\ In this regard, the Exchange notes that
proposed new optional functionality may improve the Exchange market by
attracting more Order flow, which is currently trading on less
transparent venues that contribute less to price discovery and price
competition than executions and quotes that occur on lit exchanges.
Such new Order flow will further enhance the depth and liquidity on the
Exchange, which supports just and equitable principles of trade.
Furthermore, the proposed modification to the Minimum Quantity Order
Attribute is consistent with providing market participants with greater
control over the nature of their executions so that they may achieve
their trading goals and improve the quality of their executions.
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\18\ As noted, the proposal is designed to attract liquidity to
the Exchange by allowing market participants to designate a minimum
size of contra-side Order with which to interact, thus providing
market participants with functionality that is otherwise available
to them on another exchange (i.e., Nasdaq). The designation of a
minimum size may reduce the interaction that such new Order flow
would have with smaller contra-side Orders on the Exchange, some of
which may be retail Order flow. The Exchange notes that since the
Order flow attracted by this functionality may also represent retail
investors and is in addition to the existing Order flow currently on
the Exchange, market quality for retail investors ultimately should
not be negatively impacted. Accordingly, the Exchange does not
believe that retail Orders will be disadvantaged by the proposed
change.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Specifically, the proposed change allows market participants to
condition the processing of their Orders based on a minimum execution
size. The changes to the Minimum Quantity Order Attribute will enhance
the functionality offered by the Exchange to its members, thereby
promoting its competitiveness with other exchanges and non-exchange
trading venues that already offer the same or similar functionality. As
a consequence, the proposed change will promote competition among
exchanges and their peers, which, in turn, will decrease the burden on
competition rather than place an unnecessary burden thereon.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BX-2018-040 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-BX-2018-040. 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-BX-2018-040 and should be submitted on
or before September 28, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
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\21\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-19376 Filed 9-6-18; 8:45 am]
BILLING CODE 8011-01-P
