Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Enable Exchange Members To Enter Midpoint Extended Life Orders and M-ELO Plus Continuous Book Orders With an Immediate-or-Cancel Time-in-Force Instruction, 5926-5929 [2022-02077]
Download as PDF
<![CDATA[
5926
Federal Register / Vol. 87, No. 22 / Wednesday, February 2, 2022 / Notices
equity and ETF options trades.17
Therefore, currently no exchange
possesses significant pricing power in
the execution of multiply-listed equity
and ETF options order flow. More
specifically, in November 2021, the
Exchange had less than 8% market
share of executed volume of multiplylisted equity and ETF options trades.18
The Exchange believes that the
proposed rule change reflects this
competitive environment because it
modifies the Exchange’s fees in a
manner designed to continue to
encourage Market Makers to direct
trading interest to the Exchange, to
provide liquidity and to attract order
flow. Specifically, the Exchange
believes that the modifications to the
Sliding Scale would continue to offer a
significant reduction in overall
transaction rates for Market Makers, as
well as additional reductions for Market
Makers that participate in the
Prepayment Program. To the extent that
this purpose is achieved, all the
Exchange’s market participants should
benefit from the improved market
quality and increased opportunities for
price improvement.
The Exchange also believes that the
proposed change would promote
competition between the Exchange and
other execution venues, by encouraging
additional orders to be sent to the
Exchange for execution.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 19 of the Act and
subparagraph (f)(2) of Rule 19b–4 20
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
17 See
supra note 13.
on a compilation of OCC data for
monthly volume of equity-based options and
monthly volume of ETF-based options, see id., the
Exchange’s market share in multiply-listed equity
and ETF options the Exchange’s market share in
equity-based options decreased from 9.09% for the
month of November 2020 to 7.06% for the month
of November 2021.
19 15 U.S.C. 78s(b)(3)(A).
20 17 CFR 240.19b–4(f)(2).
jspears on DSK121TN23PROD with NOTICES1
18 Based
VerDate Sep<11>2014
21:31 Feb 01, 2022
Jkt 256001
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 21 of the Act to
determine whether the proposed rule
change 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–
NYSEAMER–2022–07 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–NYSEAMER–2022–07. 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
21 15
PO 00000
U.S.C. 78s(b)(2)(B).
Frm 00148
Fmt 4703
Sfmt 4703
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–NYSEAMER–2022–07, and
should be submitted on or before
February 23, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–02080 Filed 2–1–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94076; File No. SR–
NASDAQ–2022–006]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Proposed Rule Change To
Enable Exchange Members To Enter
Midpoint Extended Life Orders and M–
ELO Plus Continuous Book Orders
With an Immediate-or-Cancel Time-inForce Instruction
January 27, 2022.
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 January
19, 2022, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to enable
Exchange members to enter Midpoint
Extended Life Orders (‘‘M–ELOs’’) and
M–ELO Plus Continuous Book (‘‘M–
ELO+CB’’) Orders with an immediateor-cancel (‘‘IOC’’) Time-in-Force (‘‘TIF’’)
instruction.3
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Citations herein to the Nasdaq Rule 4000 Series
shall refer to Equity 4.
1 15
E:\FR\FM\02FEN1.SGM
02FEN1
Federal Register / Vol. 87, No. 22 / Wednesday, February 2, 2022 / Notices
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
jspears on DSK121TN23PROD with NOTICES1
1. Purpose
The Exchange proposes to amend
Rule 4702(b)(14) and (by implication)
4702(b)(15) to enable Exchange
members to enter M–ELO and M–
ELO+CB Orders with an IOC time-inforce instruction.
On March 7, 2018, the Commission
issued an order approving the
Exchange’s proposal to adopt the M–
ELO as a new Order Type.4 A M–ELO
is a non-displayed order that is available
to all members but interacts only with
other M–ELOs and M–ELO+CBs. It is
priced at the midpoint between the
National Best Bid and Offer (‘‘NBBO’’)
and it does not become eligible for
execution until at least 10 milliseconds
elapse after its entry (the ‘‘Holding
Period’’).5 Once the Holding Period
elapses, a M–ELO becomes eligible for
execution against other M–ELOs and M–
ELO+CBs on a time-priority basis.6
A M–ELO+CB is an Order Type that
has all the characteristics and attributes
of a M–ELO Order, except that a M–
4 See Securities Exchange Act Release No. 34–
82825 (Mar. 7, 2018), 83 FR 10937 (Mar. 13, 2018)
(order approving SR–NASDAQ–2017–074).
5 In 2020, the Commission issued an order
approving the Exchange’s proposal to shorten the
Holding Period for M–ELO and M–ELO+CB Orders
from one half second to 10 milliseconds. See
Securities Exchange Act Release No. 34–88743
(April 24, 2020), 85 FR 24068 (April 30, 2020)
(order approving SR–NASDAQ–2020–011). If a
member modifies a MELO or M–ELO+CB during the
Holding Period, other than to decrease the size of
the order or to modify the marking of a sell order
as long, short, or short exempt, then such
modification will cause the Holding Period to reset.
6 If a member modifies a M–ELO or M–ELO+CB
after the Holding Period elapses, other than to
decrease the size of the order or to modify the
marking of a sell order as long, short, or short
exempt, then such modification will trigger a new
Holding Period for the order.
VerDate Sep<11>2014
21:31 Feb 01, 2022
Jkt 256001
ELO+CB that satisfies the Holding
Period is eligible to execute (at the
midpoint of the NBBO) against other
eligible M–ELO+CBs, eligible M–ELOs,
and also eligible non-displayed Orders
with Midpoint Pegging and Midpoint
Peg Post-Only Orders (‘‘Midpoint
Orders’’) resting on the Exchange’s
Continuous Book.7
Presently, neither M–ELO nor M–
ELO+CB Orders may be entered with a
TIF of IOC. An Order with a TIF of IOC
is one that is designated to deactivate
immediately after determining whether
the Order is marketable.8 In the
Exchange’s proposal to establish the M–
ELO Order Type, the Exchange
explained that it decided to exclude
IOCs from M–ELOs since it deemed the
IOC TIF, by its nature, to be
‘‘inconsistent with the Holding Period
requirement of the proposal.’’ 9 That is,
the Exchange designed M–ELO to
provide a space where investors with
longer time horizons, including
institutional investors, can interact
exclusively with each other—by virtue
of a mutually-applicable Holding
Period—without fear that aggressive
order types could trade with M–ELOs or
M–ELO+CBs to the detriment of such
M–ELOs and M–ELO+CBs immediately
upon entry and without waiting 10
milliseconds before doing so, such as
immediately before a change in the
NBBO for a particular security (i.e., risk
of adverse selection). Nevertheless,
institutional investors—which again are
the primary beneficiaries and users of
M–ELO and M–ELO+CB—have
approached the Exchange recently to
request the ability to enter IOC
instructions for their M–ELO and M–
ELO+CB Orders as a means of assisting
them in sourcing liquidity on the
Exchange’s M–ELO/M–ELO+CB Book so
that they can minimize the opportunity
costs of utilizing M–ELO and M–
7 A M–ELO+CB is eligible to execute against a
Midpoint Order if: (i) The Midpoint Order has the
Midpoint Trade Now Attribute enabled; (ii) no
other order is resting on the Continuous Book that
has a more aggressive price than the current
midpoint of the NBBO; (iii) the Midpoint Order has
rested on the Exchange’s Continuous Book for a
minimum of 10 milliseconds after the NBBO
midpoint falls within the limit set by the
participant; and (iv) the Midpoint Order satisfies
any minimum quantity requirement of the M–
ELO+CB. A buy (sell) M–ELO+CB is ranked in time
order at the midpoint among other buy (sell) M–
ELO+CBs, buy (sell) Midpoint Extended Life
Orders, and buy (sell) Midpoint Orders, as of the
time when such Orders become eligible to execute.
See Rule 4702(a)(15); see also Securities Exchange
Act Release No. 34–86938 (September 11, 2019), 84
FR 48978 (September 17, 2019) (order approving
SR–NASDAQ–2019–048).
8 Rule 4703(a)(1).
9 See Securities Exchange Act Release No. 34–
81311 (August 3, 2017), 82 FR 37248 (August 9,
2017) (SR–NASDAQ–2017–074).
PO 00000
Frm 00149
Fmt 4703
Sfmt 4703
5927
ELO+CB Orders and thus render use of
M–ELO and M–ELO+CB more efficient
and productive for participants.
That is, the functionality would
provide users with an indication as to
whether eligible contra-side liquidity
would be available to their M–ELO or
M–ELO+CB Orders and allow these
users to streamline their decisionmaking process of whether to send
additional M–ELO or M–ELO+CB
Orders to the Exchange or to seek
liquidity elsewhere.10 It would also
enable participants whose M–ELO or
M–ELO+CB Orders do not satisfy the
conditions for a Holding Period to
commence upon Order entry to have
those Orders cancel immediately rather
than be held by the System until such
time as the conditions are met, which
would allow these participants to assess
whether they wish to submit new M–
ELO or M–ELO+CB Orders that would
satisfy the conditions to commence a
Holding Period upon entry.
To avoid introducing the risks of
adverse selection associated with
enabling IOC in these contexts
(discussed above), brokers representing
institutional investors requested that
when they enter M–ELO and M–
ELO+CB Orders (which are eligible to
commence a Holding Period upon entry)
with an IOC instruction, the IOC
instruction should activate only at the
expiration of the 10 millisecond
Holding Period, rather than immediately
upon Order entry. In other words, only
after the 10 millisecond Holding Period
elapses would the System check to see
if a M–ELO or M–ELO+CB Order with
an IOC TIF is able to execute
immediately against contra-side resting
liquidity; if so, the Order will execute as
it would currently, but if not, the
System will automatically cancel the
Order rather than keep it on the Book.
If the Order at the time of entry is
unable to begin the Holding Period
(because, for example, it is entered with
a limit price that is not at or better than
the midpoint of the NBBO, if there is no
NBB or NBO at the time of entry, or the
NBBO is crossed at the time of entry),
then the Order will be automatically
cancelled immediately.
The Exchange agrees with the
participants that requested this IOC
functionality that when modified in this
manner, its use with M–ELO and M–
ELO+CB would serve a beneficial
purpose that is not inconsistent with the
Exchange’s intentions and designs for
these Order Types. That is, it would
10 The Exchange understands that some
participants representing institutional investor
orders have developed methods that mimic the
functions of IOC.
E:\FR\FM\02FEN1.SGM
02FEN1
jspears on DSK121TN23PROD with NOTICES1
5928
Federal Register / Vol. 87, No. 22 / Wednesday, February 2, 2022 / Notices
permit IOC users to check the M–ELO
or M–ELO+CB Book for contra-side
liquidity, but not in an aggressive or
riskless fashion.11 Users of the IOC
functionality in this context would still
need to endure the Holding Period
before utilizing it, and then execute
against contra-side interest if it is
available upon expiration of that
Holding Period. While the proposal
would provide for immediate
cancellation of M–ELO and M–ELO+CB
Orders that do not meet the conditions
for a Holding Period to commence upon
entry, the cancellation of these M–ELOs
and M–ELO+CBs would only indicate
that such Orders are not eligible to enter
the Holding Period (i.e., the NBBO is
crossed at the time of entry, there is no
NBB or NBO at the time of entry, or the
Order is entered with a limit price that
is not at or better than the NBBO
midpoint) and would not indicate
whether there are available contra-side
M–ELOs or M–ELO+CBs at the time of
entry on Nasdaq. The Exchange also
notes that, in other contexts, the use of
IOCs is routine and recognized as a
prudent way to seek liquidity in a
fragmented market, and its use in this
context, as modified, should not be
controversial.
Accordingly, the Exchange now
proposes to amend Rule 4702(b)(14)
(and implicitly, Rule 4702(b)(15)),
because it would incorporate
amendments to Rule 4702(b)(14)) to
permit members to enter M–ELO and
M–ELO+CB Orders with a TIF
instruction of IOC, with the caveat that,
when used for these Order Types, the
IOC instruction will activate upon the
expiration of the Holding Period, unless
the Order is unable to begin the Holding
Period upon entry, in which case it will
cancel immediately.
As part of the surveillance the
Exchange currently performs, M–ELOs
and M–ELO+CBs with IOC would be
subject to real-time surveillance to
determine if they are being abused by
market participants. In addition, as is
the case for ordinary M–ELOs and M–
ELO+CBs, the Exchange will monitor
the use of M–ELOs and M–ELO+CBs
with IOC with the intent to apply
additional measures, as necessary, to
ensure their usage is appropriately tied
to the intent of the Order Types. The
Exchange is committed to determining
whether there is opportunity or
prevalence of behavior that is
inconsistent with normal risk
management behavior, such as excessive
cancellations. Manipulative abuse is
11 Nasdaq reiterates that by design, spreadcrossing orders do not interact with MELO or M–
ELO+CB Orders.
VerDate Sep<11>2014
21:31 Feb 01, 2022
Jkt 256001
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 M–ELO or M–
ELO+CB Order Types may be subject to
penalties or other participant
requirements to discourage such
behavior, should it occur.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,12 in general, and furthers the
objectives of Section 6(b)(5) of the Act,13
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 assist market
participants in sourcing liquidity on the
Exchange’s M–ELO/M–ELO+CB Book so
that they can minimize the opportunity
costs associated with utilizing M–ELO
and M–ELO+CB Orders and thus render
use of M–ELO and M–ELO+CB more
efficient and productive. At the same
time, the proposal avoids exposing M–
ELO and M–ELO+CB orders to the risks
of adverse selection associated with
aggressive IOC by proposing that, when
used in the contexts of M–ELO and M–
ELO+CB Orders, the IOC instruction
will activate only at the expiration of
the 10 millisecond Holding Period,
rather than immediately upon Order
entry, as orders with a TIF of IOC do in
other contexts. The exception to this is
if the M–ELO or M–ELO+CB Order with
an IOC instruction is unable to begin the
Holding Period upon entry, as will
occur if the Market is crossed at the time
of entry, there is no NBB or NBO at the
time of entry, or the Order is entered
with a limit price that is not at or better
than the NBBO midpoint. In such cases,
the Order will be cancelled immediately
upon entry. Doing so is consistent with
the spirit of the IOC instruction, in that
the market participant is indicating a
desire for their Order to persist for the
minimum period possible, while a M–
ELO or M–ELO+CB Order that is
ineligible to begin the Holding Period
upon entry could potentially persist in
a held state until it is cancelled by the
System at the end of Market Hours.
Crucially, the immediate cancel of an
Order that is ineligible to begin the
Holding Period upon entry does not
provide information to the participant
about the underlying state of the M–
12 15
13 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00150
Fmt 4703
Sfmt 4703
ELO/M–ELO+CB Book.14 When used in
this context, IOC will not be useful to
participants engaging in strategies that
are time sensitive. Thus, this proposal
will not frustrate the underlying design
of M–ELO and M–ELO+CB Orders,
which again is to provide investors,
including institutional investors, with
longer time horizons to safely interact
with each other without interacting with
aggressive or time sensitive orders.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the proposal will enhance the
utility and efficiency of the M–ELO and
M–ELO+CB Order Types, which in turn
will render the Exchange a more
attractive venue for market participants
that stand to benefit from these Order
Types. The proposed IOC instruction
will not burden intra-market
competition as it will be available for
use by all market participants.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
14 The existence of resting interest on the M–ELO/
M–ELO+CB Book is not a prerequisite for the Order
to enter the Holding Period. Therefore, the
cancellation of these M–ELOs and M–ELO+CBs
only indicate that such Orders are not eligible to
enter the Holding Period (i.e., the NBBO is crossed
at the time of entry, there is no NBB or NBO at the
time of entry, or the Order is entered with a limit
price that is not at or better than the NBBO
midpoint) and does not indicate whether there are
available contra-side M–ELOs or M–ELO+CBs at the
time of entry on Nasdaq. Consequently, the IOC
instruction cannot be exploited to check the Book
for liquidity in a riskless fashion (e.g., by cancelling
before the Holding Period expires).
E:\FR\FM\02FEN1.SGM
02FEN1
Federal Register / Vol. 87, No. 22 / Wednesday, February 2, 2022 / Notices
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2022–006 on the subject line.
jspears on DSK121TN23PROD with NOTICES1
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–2022–006. 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–2022–006 and
should be submitted on or before
February 23, 2022.
VerDate Sep<11>2014
21:31 Feb 01, 2022
Jkt 256001
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.15
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–02077 Filed 2–1–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94091]
Order Granting Application by Nasdaq
PHLX LLC for an Exemption Pursuant
to Section 36(a) of the Exchange Act
From the Rule Filing Requirements of
Section 19(b) of the Exchange Act With
Respect to Certain Rules Incorporated
by Reference
January 27, 2022.
Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) has filed with the
Securities and Exchange Commission
(‘‘Commission’’) an application for an
exemption under Section 36(a)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 from the rule filing
requirements of Section 19(b) of the
Exchange Act 2 with respect to certain
rules of the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
that the Exchange seeks to incorporate
by reference.3 Section 36 of the
Exchange Act, subject to certain
limitations, authorizes the Commission
to conditionally or unconditionally
exempt any person, security, or
transaction, or any class thereof, from
any provision of the Exchange Act or
rule thereunder, if necessary or
appropriate in the public interest and
consistent with the protection of
investors.
The Exchange has requested, pursuant
to Rule 0–12 under the Exchange Act,4
that the Commission grant the Exchange
an exemption from the rule filing
requirements of Section 19(b) of the
Exchange Act for changes to the
Exchange’s rules that are effected solely
by virtue of a change to a crossreferenced FINRA rule. Specifically, the
Exchange requests that it be permitted
to incorporate by reference changes
made to the FINRA rules that are crossreferenced in the Exchange’s rules
identified below, without the need for
the Exchange to file separately similar
15 17
CFR 200.30–3(a)(12).
U.S.C. 78mm(a)(1).
2 15 U.S.C. 78s(b).
3 See Letter from Angela S. Dunn, Principal
Associate General Counsel, Phlx, to J. Matthew
DeLesDernier, Assistant Secretary, Commission,
dated August 26, 2021 (‘‘Exemptive Request’’).
4 17 CFR 240.0–12.
1 15
PO 00000
Frm 00151
Fmt 4703
Sfmt 4703
5929
proposed rule changes pursuant to
Section 19(b) of the Exchange Act: 5
• General 9, Section 1(a) (Prohibition
Against Trading Ahead of Customer
Orders) cross-references FINRA Rule
5320 (except for FINRA Rule 5320.02(b)
and the reference to FINRA Rule 6420
in FINRA Rule 5320).
• Options 10, Section 20 (Options
Communications) cross-references
FINRA Rule 2220 (except for FINRA
Rule 2220(c)).
The Exchange represents that the
FINRA rules listed above are regulatory
rules and not trading rules.6 The
Exchange represents that, as a condition
to the requested exemption from Section
19(b) of the Exchange Act, the Exchange
will provide written notice to its
members and member organizations
whenever FINRA proposes a change to
FINRA Rule 2220 or 5320.7 The
Exchange states that such notice will
alert its members, member
organizations, and associated persons to
the proposed FINRA rule change and
give them an opportunity to comment
on the proposal.8 The Exchange further
represents that it will inform members,
member organizations, and associated
persons in writing when the
Commission approves any such
proposed rule changes.9
According to the Exchange, this
exemption is appropriate because it
would result in the Exchange’s rules
pertaining to prohibition against trading
ahead of customer orders and options
communications being consistent with
the relevant cross-referenced FINRA
rules at all times, thus ensuring
consistent regulation of joint members
of Phlx and FINRA.10 The Exchange
further states that, even if members are
not joint members of Phlx and FINRA,
the exemption is appropriate because it
will permit its rules to remain
consistent with FINRA’s rules and
ensure consistent treatment of industry
members with respect to the
aforementioned rules.11
The Commission has issued
exemptions similar to the Exchange’s
5 See
Exemptive Request, supra note 3, at 2.
id. at 2, n.8. The Exchange also states that
it is not ‘‘cherry picking’’ because the Exchange
would be incorporating categories of rules. See id.
7 See id. at 2–3. The Exchange represents that it
will provide such notice via a posting on the same
website location where the Exchange posts its own
rule filings pursuant to Rule 19b–4(l) within the
time frame required by such rule. See id. at 3, n.9.
The website posting will include a link to the
location on FINRA’s website where the applicable
proposed rule change is posted. See id.
8 See id. at 3.
9 See id.
10 See id. at 2.
11 See id.
6 See
E:\FR\FM\02FEN1.SGM
02FEN1
]]>Agencies
[Federal Register Volume 87, Number 22 (Wednesday, February 2, 2022)]
[Notices]
[Pages 5926-5929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02077]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94076; File No. SR-NASDAQ-2022-006]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Enable Exchange Members To
Enter Midpoint Extended Life Orders and M-ELO Plus Continuous Book
Orders With an Immediate-or-Cancel Time-in-Force Instruction
January 27, 2022.
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 January 19, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to enable Exchange members to enter Midpoint
Extended Life Orders (``M-ELOs'') and M-ELO Plus Continuous Book (``M-
ELO+CB'') Orders with an immediate-or-cancel (``IOC'') Time-in-Force
(``TIF'') instruction.\3\
---------------------------------------------------------------------------
\3\ Citations herein to the Nasdaq Rule 4000 Series shall refer
to Equity 4.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at
the principal
[[Page 5927]]
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 proposes to amend Rule 4702(b)(14) and (by
implication) 4702(b)(15) to enable Exchange members to enter M-ELO and
M-ELO+CB Orders with an IOC time-in-force instruction.
On March 7, 2018, the Commission issued an order approving the
Exchange's proposal to adopt the M-ELO as a new Order Type.\4\ A M-ELO
is a non-displayed order that is available to all members but interacts
only with other M-ELOs and M-ELO+CBs. It is priced at the midpoint
between the National Best Bid and Offer (``NBBO'') and it does not
become eligible for execution until at least 10 milliseconds elapse
after its entry (the ``Holding Period'').\5\ Once the Holding Period
elapses, a M-ELO becomes eligible for execution against other M-ELOs
and M-ELO+CBs on a time-priority basis.\6\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 34-82825 (Mar. 7,
2018), 83 FR 10937 (Mar. 13, 2018) (order approving SR-NASDAQ-2017-
074).
\5\ In 2020, the Commission issued an order approving the
Exchange's proposal to shorten the Holding Period for M-ELO and M-
ELO+CB Orders from one half second to 10 milliseconds. See
Securities Exchange Act Release No. 34-88743 (April 24, 2020), 85 FR
24068 (April 30, 2020) (order approving SR-NASDAQ-2020-011). If a
member modifies a MELO or M-ELO+CB during the Holding Period, other
than to decrease the size of the order or to modify the marking of a
sell order as long, short, or short exempt, then such modification
will cause the Holding Period to reset.
\6\ If a member modifies a M-ELO or M-ELO+CB after the Holding
Period elapses, other than to decrease the size of the order or to
modify the marking of a sell order as long, short, or short exempt,
then such modification will trigger a new Holding Period for the
order.
---------------------------------------------------------------------------
A M-ELO+CB is an Order Type that has all the characteristics and
attributes of a M-ELO Order, except that a M-ELO+CB that satisfies the
Holding Period is eligible to execute (at the midpoint of the NBBO)
against other eligible M-ELO+CBs, eligible M-ELOs, and also eligible
non-displayed Orders with Midpoint Pegging and Midpoint Peg Post-Only
Orders (``Midpoint Orders'') resting on the Exchange's Continuous
Book.\7\
---------------------------------------------------------------------------
\7\ A M-ELO+CB is eligible to execute against a Midpoint Order
if: (i) The Midpoint Order has the Midpoint Trade Now Attribute
enabled; (ii) no other order is resting on the Continuous Book that
has a more aggressive price than the current midpoint of the NBBO;
(iii) the Midpoint Order has rested on the Exchange's Continuous
Book for a minimum of 10 milliseconds after the NBBO midpoint falls
within the limit set by the participant; and (iv) the Midpoint Order
satisfies any minimum quantity requirement of the M-ELO+CB. A buy
(sell) M-ELO+CB is ranked in time order at the midpoint among other
buy (sell) M-ELO+CBs, buy (sell) Midpoint Extended Life Orders, and
buy (sell) Midpoint Orders, as of the time when such Orders become
eligible to execute. See Rule 4702(a)(15); see also Securities
Exchange Act Release No. 34-86938 (September 11, 2019), 84 FR 48978
(September 17, 2019) (order approving SR-NASDAQ-2019-048).
---------------------------------------------------------------------------
Presently, neither M-ELO nor M-ELO+CB Orders may be entered with a
TIF of IOC. An Order with a TIF of IOC is one that is designated to
deactivate immediately after determining whether the Order is
marketable.\8\ In the Exchange's proposal to establish the M-ELO Order
Type, the Exchange explained that it decided to exclude IOCs from M-
ELOs since it deemed the IOC TIF, by its nature, to be ``inconsistent
with the Holding Period requirement of the proposal.'' \9\ That is, the
Exchange designed M-ELO to provide a space where investors with longer
time horizons, including institutional investors, can interact
exclusively with each other--by virtue of a mutually-applicable Holding
Period--without fear that aggressive order types could trade with M-
ELOs or M-ELO+CBs to the detriment of such M-ELOs and M-ELO+CBs
immediately upon entry and without waiting 10 milliseconds before doing
so, such as immediately before a change in the NBBO for a particular
security (i.e., risk of adverse selection). Nevertheless, institutional
investors--which again are the primary beneficiaries and users of M-ELO
and M-ELO+CB--have approached the Exchange recently to request the
ability to enter IOC instructions for their M-ELO and M-ELO+CB Orders
as a means of assisting them in sourcing liquidity on the Exchange's M-
ELO/M-ELO+CB Book so that they can minimize the opportunity costs of
utilizing M-ELO and M-ELO+CB Orders and thus render use of M-ELO and M-
ELO+CB more efficient and productive for participants.
---------------------------------------------------------------------------
\8\ Rule 4703(a)(1).
\9\ See Securities Exchange Act Release No. 34-81311 (August 3,
2017), 82 FR 37248 (August 9, 2017) (SR-NASDAQ-2017-074).
---------------------------------------------------------------------------
That is, the functionality would provide users with an indication
as to whether eligible contra-side liquidity would be available to
their M-ELO or M-ELO+CB Orders and allow these users to streamline
their decision-making process of whether to send additional M-ELO or M-
ELO+CB Orders to the Exchange or to seek liquidity elsewhere.\10\ It
would also enable participants whose M-ELO or M-ELO+CB Orders do not
satisfy the conditions for a Holding Period to commence upon Order
entry to have those Orders cancel immediately rather than be held by
the System until such time as the conditions are met, which would allow
these participants to assess whether they wish to submit new M-ELO or
M-ELO+CB Orders that would satisfy the conditions to commence a Holding
Period upon entry.
---------------------------------------------------------------------------
\10\ The Exchange understands that some participants
representing institutional investor orders have developed methods
that mimic the functions of IOC.
---------------------------------------------------------------------------
To avoid introducing the risks of adverse selection associated with
enabling IOC in these contexts (discussed above), brokers representing
institutional investors requested that when they enter M-ELO and M-
ELO+CB Orders (which are eligible to commence a Holding Period upon
entry) with an IOC instruction, the IOC instruction should activate
only at the expiration of the 10 millisecond Holding Period, rather
than immediately upon Order entry. In other words, only after the 10
millisecond Holding Period elapses would the System check to see if a
M-ELO or M-ELO+CB Order with an IOC TIF is able to execute immediately
against contra-side resting liquidity; if so, the Order will execute as
it would currently, but if not, the System will automatically cancel
the Order rather than keep it on the Book. If the Order at the time of
entry is unable to begin the Holding Period (because, for example, it
is entered with a limit price that is not at or better than the
midpoint of the NBBO, if there is no NBB or NBO at the time of entry,
or the NBBO is crossed at the time of entry), then the Order will be
automatically cancelled immediately.
The Exchange agrees with the participants that requested this IOC
functionality that when modified in this manner, its use with M-ELO and
M-ELO+CB would serve a beneficial purpose that is not inconsistent with
the Exchange's intentions and designs for these Order Types. That is,
it would
[[Page 5928]]
permit IOC users to check the M-ELO or M-ELO+CB Book for contra-side
liquidity, but not in an aggressive or riskless fashion.\11\ Users of
the IOC functionality in this context would still need to endure the
Holding Period before utilizing it, and then execute against contra-
side interest if it is available upon expiration of that Holding
Period. While the proposal would provide for immediate cancellation of
M-ELO and M-ELO+CB Orders that do not meet the conditions for a Holding
Period to commence upon entry, the cancellation of these M-ELOs and M-
ELO+CBs would only indicate that such Orders are not eligible to enter
the Holding Period (i.e., the NBBO is crossed at the time of entry,
there is no NBB or NBO at the time of entry, or the Order is entered
with a limit price that is not at or better than the NBBO midpoint) and
would not indicate whether there are available contra-side M-ELOs or M-
ELO+CBs at the time of entry on Nasdaq. The Exchange also notes that,
in other contexts, the use of IOCs is routine and recognized as a
prudent way to seek liquidity in a fragmented market, and its use in
this context, as modified, should not be controversial.
---------------------------------------------------------------------------
\11\ Nasdaq reiterates that by design, spread-crossing orders do
not interact with MELO or M-ELO+CB Orders.
---------------------------------------------------------------------------
Accordingly, the Exchange now proposes to amend Rule 4702(b)(14)
(and implicitly, Rule 4702(b)(15)), because it would incorporate
amendments to Rule 4702(b)(14)) to permit members to enter M-ELO and M-
ELO+CB Orders with a TIF instruction of IOC, with the caveat that, when
used for these Order Types, the IOC instruction will activate upon the
expiration of the Holding Period, unless the Order is unable to begin
the Holding Period upon entry, in which case it will cancel
immediately.
As part of the surveillance the Exchange currently performs, M-ELOs
and M-ELO+CBs with IOC would be subject to real-time surveillance to
determine if they are being abused by market participants. In addition,
as is the case for ordinary M-ELOs and M-ELO+CBs, the Exchange will
monitor the use of M-ELOs and M-ELO+CBs with IOC with the intent to
apply additional measures, as necessary, to ensure their usage is
appropriately tied to the intent of the Order Types. The Exchange is
committed to determining whether there is opportunity or prevalence of
behavior that is inconsistent with normal risk management behavior,
such as excessive cancellations. 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 M-ELO or M-ELO+CB Order Types may be
subject to penalties or other participant requirements to discourage
such behavior, should it occur.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\13\ 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.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The proposal will assist market participants in sourcing liquidity
on the Exchange's M-ELO/M-ELO+CB Book so that they can minimize the
opportunity costs associated with utilizing M-ELO and M-ELO+CB Orders
and thus render use of M-ELO and M-ELO+CB more efficient and
productive. At the same time, the proposal avoids exposing M-ELO and M-
ELO+CB orders to the risks of adverse selection associated with
aggressive IOC by proposing that, when used in the contexts of M-ELO
and M-ELO+CB Orders, the IOC instruction will activate only at the
expiration of the 10 millisecond Holding Period, rather than
immediately upon Order entry, as orders with a TIF of IOC do in other
contexts. The exception to this is if the M-ELO or M-ELO+CB Order with
an IOC instruction is unable to begin the Holding Period upon entry, as
will occur if the Market is crossed at the time of entry, there is no
NBB or NBO at the time of entry, or the Order is entered with a limit
price that is not at or better than the NBBO midpoint. In such cases,
the Order will be cancelled immediately upon entry. Doing so is
consistent with the spirit of the IOC instruction, in that the market
participant is indicating a desire for their Order to persist for the
minimum period possible, while a M-ELO or M-ELO+CB Order that is
ineligible to begin the Holding Period upon entry could potentially
persist in a held state until it is cancelled by the System at the end
of Market Hours. Crucially, the immediate cancel of an Order that is
ineligible to begin the Holding Period upon entry does not provide
information to the participant about the underlying state of the M-ELO/
M-ELO+CB Book.\14\ When used in this context, IOC will not be useful to
participants engaging in strategies that are time sensitive. Thus, this
proposal will not frustrate the underlying design of M-ELO and M-ELO+CB
Orders, which again is to provide investors, including institutional
investors, with longer time horizons to safely interact with each other
without interacting with aggressive or time sensitive orders.
---------------------------------------------------------------------------
\14\ The existence of resting interest on the M-ELO/M-ELO+CB
Book is not a prerequisite for the Order to enter the Holding
Period. Therefore, the cancellation of these M-ELOs and M-ELO+CBs
only indicate that such Orders are not eligible to enter the Holding
Period (i.e., the NBBO is crossed at the time of entry, there is no
NBB or NBO at the time of entry, or the Order is entered with a
limit price that is not at or better than the NBBO midpoint) and
does not indicate whether there are available contra-side M-ELOs or
M-ELO+CBs at the time of entry on Nasdaq. Consequently, the IOC
instruction cannot be exploited to check the Book for liquidity in a
riskless fashion (e.g., by cancelling before the Holding Period
expires).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the proposal
will enhance the utility and efficiency of the M-ELO and M-ELO+CB Order
Types, which in turn will render the Exchange a more attractive venue
for market participants that stand to benefit from these Order Types.
The proposed IOC instruction will not burden intra-market competition
as it will be available for use by all market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 5929]]
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-NASDAQ-2022-006 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-2022-006. 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-2022-006 and should
be submitted on or before February 23, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------
\15\ 17 CFR 200.30-3(a)(12).
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02077 Filed 2-1-22; 8:45 am]
BILLING CODE 8011-01-P
