Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Anti-Internalization Functionality in Equity 4, Rule 4757, 89677-89680 [2024-26192]

Download as PDF Federal Register / Vol. 89, No. 219 / Wednesday, November 13, 2024 / Notices investors and listed companies.’’ 26 The fact that this market is competitive has also long been recognized by the courts. In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit stated as follows: ‘‘[n]o one disputes that competition for order flow is ‘fierce.’ . . . As the SEC explained, ‘[i]n the U.S. national market system, buyers and sellers of securities, and the brokerdealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution’; [and] ‘no exchange can afford to take its market share percentages for granted’ because ‘no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers’. . . .’’.27 Accordingly, the Exchange does not believe its proposed change imposes any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 28 and paragraph (f) of Rule 19b–4 29 thereunder. 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 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 will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments lotter on DSK11XQN23PROD with NOTICES1 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. 26 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005). 27 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010) (quoting Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770, 74782– 83 (December 9, 2008) (SR–NYSEArca–2006–21)). 28 15 U.S.C. 78s(b)(3)(A). 29 17 CFR 240.19b–4(f). VerDate Sep<11>2014 17:40 Nov 12, 2024 Jkt 265001 89677 Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION Electronic Comments [Release No. 34–101520; File No. SR– NASDAQ–2024–064] • 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– CboeEDGX–2024–070 on the subject line. Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange’s Anti-Internalization Functionality in Equity 4, Rule 4757 Paper Comments November 6, 2024. • 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–CboeEDGX–2024–070. 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 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–CboeEDGX–2024–070 and should be submitted on or before December 4, 2024. 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 October 25, 2024, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.30 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–26193 Filed 11–12–24; 8:45 am] I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the Exchange’s anti-internalization functionality in Equity 4, Rule 4757. 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 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 Equity 4, Rule 4757(a)(4) to offer increased functionality as it relates to BILLING CODE 8011–01–P 1 15 30 17 PO 00000 CFR 200.30–3(a)(12). Frm 00109 Fmt 4703 Sfmt 4703 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. E:\FR\FM\13NON1.SGM 13NON1 89678 Federal Register / Vol. 89, No. 219 / Wednesday, November 13, 2024 / Notices anti-internalization. Specifically, the Exchange proposes to (i) allow participants that directly submit orders to the System as Members on the Exchange and submit orders to the System through Sponsored Access 3 as a Sponsored Participant, to direct that quotes/orders entered into the System directly as a Member not execute against quotes/orders submitted as a Sponsored Participant; (ii) specify when antiinternalization will activate; (iii) introduce an anti-internalization strategy that uses the strategy of the removing order; and (v) make other clarifying changes. lotter on DSK11XQN23PROD with NOTICES1 Affiliate Anti-Internalization Currently, Equity 4, Rule 4757(a)(4) provides that market participants may direct that quotes/orders entered into the System not execute against either quotes/orders entered under the same MPID (‘‘MPID Level AIQ’’) or quotes/ orders entered across MPIDs under Common Ownership (‘‘Organization Level AIQ’’).4 In addition, market participants using the OUCH order entry protocol may assign to orders entered through a specific order entry port a unique group identification modifier that will prevent quotes/orders with such modifier from executing against each other. Anti-internalization or selfmatch prevention functionality assists participants in reducing trading costs from unwanted executions potentially resulting from the interaction of executable buy and sell trading interest from the same firm. The Exchange proposes to enhance its current self-match prevention functionality to allow participants that demonstrate (i) membership on the Exchange through which they directly submit orders to the System and (ii) participation as a Sponsored Participant whereby they submit orders to the System through Sponsored Access, to direct that quotes/orders entered into the System directly as a Member not execute against quotes/orders submitted as a Sponsored Participant (‘‘Affiliate Level AIQ’’).5 The proposed enhancement would be in addition to 3 See General 2, Section 22(a). Sponsored Access shall mean an arrangement whereby a member permits its customers to enter orders into the System that bypass the member’s trading system and are routed directly to the Exchange, including routing through a service bureau or other third party technology provider. 4 For purposes of Equity 4, Rule 4757, the term ‘‘Common Ownership’’ shall mean participants under 75% common ownership or control. 5 The Exchange will require firms requesting to use Affiliate Level AIQ to complete an affidavit stating: (i) it is currently a Member of the Exchange that submits orders directly to the System, and (ii) it also submits orders to the System through a Sponsored Access arrangement. VerDate Sep<11>2014 17:40 Nov 12, 2024 Jkt 265001 the other levels of self-match prevention offered today. Under the proposed rule change, the anti-internalization functionality would continue to be an optional feature. If a firm chooses to take advantage of self-match prevention, the firm would need to opt-in to the self-match prevention functionality, as is the case today. The purpose of this proposed change is to extend self-match prevention functionality to prevent transactions between a firm’s orders submitted directly to the System and through Sponsored Access. There are situations where an individual firm would choose to submit orders to the Exchange through different mechanisms. For instance, a firm may employ different trading strategies across different trading desks and choose to send orders for one strategy to the Exchange through a direct connection while the other strategy is sent through Sponsored Access. The proposed functionality would serve as an additional tool that participants may enable in order to assist with compliance with the various securities laws relating to potentially manipulative trading activity such as wash sales 6 and self-trades.7 Additionally, the proposed functionality would provide firms an additional solution to manage order flow by preventing undesirable executions where the firm submits orders in multiple formats (i.e., direct connection or Sponsored Access). As is the case with the existing risk tools, participants, and not the Exchange, have full responsibility for ensuring that their orders comply with applicable securities rules, laws, and regulations. Furthermore, as is the case with the existing risk settings, the Exchange does not believe that the use of the proposed self-match prevention functionality can replace participant-managed risk management solutions. Anti-Internalization Activation The Exchange also proposes to provide that, unless participants 6 A ‘‘wash sale’’ is generally defined as a trade involving no change in beneficial ownership that is intended to produce the false appearance of trading and is strictly prohibited under both the federal securities laws and FINRA rules. See, e.g., 15 U.S.C 78i(a)(1); FINRA Rule 6140(b) (‘‘Other Trading Practices’’). 7 Self-trades are ‘‘transactions in a security resulting from the unintentional interaction of orders originating from the same firm that involve no change in beneficial ownership of the security.’’ FINRA requires members to have policies and procedures in place that are reasonably designed to review trading activity for, and prevent, a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or related algorithms or trading desks. See FINRA Rule 5210, Supplementary Material .02. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 designate otherwise, for antiinternalization to activate across orders, the orders must reflect the same antiinternalization level. For example, if an order has designated anti-internalization at an MPID level (i.e., quotes/orders entered into the System shall not execute against quotes/orders entered under the same MPID), antiinternalization will only activate against another order designated with antiinternalization at an MPID level. This is a departure from how antiinternalization activates today. Currently, anti-internalization activates across orders with different antiinternalization levels. For example, a resting order with MPID Level AIQ can have anti-internalization activated against it if an incoming order with Organization Level AIQ has the same Organization ID as the resting order. With the introduction of Affiliate Level AIQ, the anti-internalization levels must match across both orders for antiinternalization to be activated, in order to prevent erroneous activation of antiinternalization.8 However, the Exchange proposes to preserve current functionality by providing participants with the option to elect to have antiinternalization activated against any anti-internalization level. ‘‘Use Remover’’ Strategy The Exchange currently provides three versions of self-match prevention functionality to allow participants to choose how orders are handled in the event of a self-match situation: (1) decrement, (2) cancel oldest, and (3) cancel newest. Under the first version (‘‘decrement’’), if the self-match orders have the same share size, both orders will cancel back to the customer. If the orders are not equivalent in size, the smaller order will cancel back to the originating customer and the larger order will decrement by the size of the smaller order. The remaining shares of the larger order will remain on the book. Under the second version (‘‘cancel oldest’’), the full size of the order residing on the book will cancel back to the customer if the incoming order would execute against it. The incoming order will remain intact with no changes. Under the third version (‘‘cancel newest’’), the full size of the order coming into the book will cancel 8 For example, assume Firm 1 accesses the Exchange directly and as a Sponsored Participant via Firm 2. Assume Firm 1 sends an order as a Sponsored Participant through Firm 2 with Affiliate Level AIQ enabled. Assume Firm 2 then sends an order unrelated to Firm 1 with Organization Level AIQ. If the current behavior prevailed, antiinternalization would activate and the orders would not execute, resulting in an undesirable outcome. E:\FR\FM\13NON1.SGM 13NON1 Federal Register / Vol. 89, No. 219 / Wednesday, November 13, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 back to the customer. The resting order will remain intact with no changes. The Exchange proposes to add a new strategy (‘‘use remover’’), which would allow for a resting order to use the strategy of the removing order. If the use remover strategy is on an order, it will only have anti-internalization activated against it when it is the resting order and will never trigger antiinternalization against another order when it is the incoming order. The Exchange proposes to introduce the ‘‘use remover’’ strategy in order to maintain existing anti-internalization functionality that would otherwise become obsolete with the introduction of the default requirement for antiinternalization activation (i.e., the orders must reflect the same antiinternalization level). As described above, currently, anti-internalization activates across orders with different anti-internalization levels. Currently, resting orders that have antiinternalization disabled are still subject to anti-internalization functionality, based on the anti-internalization selection of the incoming orders. For example, currently, if Firm 1 sends an order with anti-internalization disabled and then Firm 2 sends an order with Organization Level AIQ with a decrement strategy, anti-internalization would activate between the two orders based on the incoming order’s strategy because of the Organization Level AIQ. Assuming the Firm does not designate that anti-internalization activate across quotes/orders, the aforementioned example would no longer occur because Affiliate Level AIQ necessitates matching anti-internalization levels. The Exchange wishes to maintain such functionality as an option for participants and introduction of the use remover strategy would allow participants to choose to have a resting order use the anti-internalization strategy of the removing order. Taken together, the Exchange believes that the proposed anti-internalization enhancements would provide participants with more tailored selftrade functionality that allows them to manage their trading as appropriate based on the participant’s business needs. Clarifying Changes Lastly, the Exchange proposes to make several clarifying changes to Equity 4, Rule 4757(a)(4) to promote clarity. First, the Exchange proposes to codify which strategy prevails when antiinternalization strategies differ between two orders. Specifically, the Exchange proposes to provide that, when anti- VerDate Sep<11>2014 17:40 Nov 12, 2024 Jkt 265001 internalization strategies differ between two orders, the strategy of the order removing liquidity will apply and the strategy of the resting order will be ignored. This is consistent with current Exchange and industry practice. In addition, the Exchange proposes to modify the text introducing the various anti-internalization strategies to state that, ‘‘In each anti-internalization case, as described in this paragraph (4), a market participant may elect from the following strategies’’, to make it clear that any strategy may be selected for each anti-internalization level. Relatedly, the Exchange proposes to delete language stating that, ‘‘The foregoing options may be applied to all orders entered under the same MPID, across MPIDs under Common Ownership, or, in the case of market participants using the OUCH order entry protocol, may be applied to all orders entered through a specific order entry port.’’ The Exchange believes that such language is redundant, as the modified introductory language makes it clear that the anti-internalization strategies may be applied to each antiinternalization level. Finally, the Exchange also proposes to add the names of the existing antiinternalization strategies (i.e., Decrement, Cancel Oldest, and Cancel Newest) before the description of such strategies for clarity. Implementation The Exchange intends to introduce this new functionality by the first quarter of 2025. The Exchange will issue an Equities Trader Alert to provide notification of the change and relevant date prior to introducing the new functionality. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,9 in general, and furthers the objectives of Section 6(b)(5) of the Act,10 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 Exchange believes that the proposed Affiliate Level AIQ functionality promotes just and equitable principles of trade by allowing individual firms to better manage order flow and prevent undesirable trading activity such as wash sales 11 or self9 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 11 Supra note 6. 10 15 PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 89679 trades 12 that may occur as a result of the velocity of trading in today’s high-speed marketplace. The proposed Affiliate Level AIQ functionality does not introduce novel functionality, as the proposed amendment extends the current anti-internalization functionality to another trading relationship. For instance, a participant may operate trading desk 1 that accesses the Exchange via the Member’s direct connection, as well as trading desk 2 that accesses the Exchange as a Sponsored Participant. While these desks may operate different trading strategies, a participant may desire to prevent these desks from trading versus each other in the marketplace because the orders are originating from the same entity. Here, participants may desire anti-internalization functionality on an Affiliate Level AIQ that will help them achieve compliance 13 with regulatory rules regarding wash sales and selftrades in a very similar manner to the way that the current anti-internalization functionality applies to existing antiinternalization levels. The proposed Affiliate Level AIQ functionality will also assist participants in reducing trading costs from unwanted executions potentially resulting from the interaction of executable buy and sell trading interest from the same firm. The Exchange believes that the other proposed changes, including modifying the default procedure for activating antiinternalization while preserving the current functionality as an option for participants, adding the use remover strategy, and making clarifying changes, also promote just and equitable principles of trade by providing participants with more tailored selftrade functionality that allows them to manage their trading as appropriate based on the participant’s business needs and providing clarity and transparency to the rules. The Exchange also believes that the proposed rule change is fair and equitable and is not designed to permit unfair discrimination, in accordance with Section 6(b)(5) of the Act,14 as use of the proposed Affiliate Level AIQ functionality and related features of the proposal are optional, and use is not a prerequisite for trading on the Exchange. 12 Supra note 7. Exchange reminds participants that while they may utilize anti-internalization to help prevent potential transactions such as wash sales or selftrades, participants, not the Exchange, are ultimately responsible for ensuring that their orders comply with applicable rules, laws, and regulations. 14 15 U.S.C. 78f(b)(5). 13 The E:\FR\FM\13NON1.SGM 13NON1 89680 Federal Register / Vol. 89, No. 219 / Wednesday, November 13, 2024 / Notices 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. The proposed rule change is designed to enhance self-match prevention functionality provided to the Exchange’s participants and will benefit participants that wish to protect their quotes and orders entered into the System directly as a Member against trading with quotes/orders submitted as a Sponsored Participant. The new functionality is also completely voluntary, and members that wish to use the current functionality (or opt out altogether) can also continue to do so. The Exchange does not believe that providing more flexibility to participants will have any significant impact on competition. In fact, the Exchange believes that the proposed rule change is evidence of the competitive environment where exchanges must continually improve their offerings to maintain competitive standing. 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. lotter on DSK11XQN23PROD with NOTICES1 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)(iii) of the Act 15 and subparagraph (f)(6) of Rule 19b–4 thereunder.16 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 necessary or appropriate in the public interest, for the protection of 15 15 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file 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. 16 17 VerDate Sep<11>2014 17:40 Nov 12, 2024 Jkt 265001 investors, or 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–NASDAQ–2024–064 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–2024–064. 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 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–NASDAQ–2024–064 and should be PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 submitted on or before December 4, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–26192 Filed 11–12–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 35378; File No. 812–15564] Franklin Lexington Private Markets Fund, et al. Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’). ACTION: Notice. AGENCY: Notice of application for an order (‘‘Order’’) under sections 17(d) and 57(i) of the Investment Company Act of 1940 (the ‘‘Act’’) and rule 17d–1 under the Act to permit certain joint transactions otherwise prohibited by sections 17(d) and 57(a)(4) of the Act and rule 17d–1 under the Act. SUMMARY OF APPLICATION: Applicants request an order to permit closed-end management investment companies and business development companies to coinvest in portfolio companies with each other and with certain affiliated investment entities. APPLICANTS: Franklin Lexington Private Markets Fund, Franklin Templeton Fund Adviser, LLC, Franklin Advisers, Inc., Lexington Advisors LLC, Lexington Partners L.P., CIP V (Offshore), L.P., Irrevocable Trust Agreement CIB/3036 Account, Irrevocable Trust Agreement CIB/3299 Account, LCP Co-Invest Feeder—G, L.P., LCP Co-Invest Global Feeder—G, L.P., LCP IX (Offshore), L.P., LCP IX (Peru), L.P., LCP IX Co-Invest Partners A, L.P., Lexington Alpine CoInvest, L.P., Lexington Kale Co-Invest, L.P., Lexington KC Co-Invest—G, L.P., Lexington Loki Co-Invest, L.P., Lexington Loki Feeder, L.P., Lexington Secretariat Co-Invest, L.P., Lexington Secretariat Feeder, L.P., LGP Offshore IX, L.P., LGP Offshore VI, L.P., LCP IX (Luxembourg) Master SCSp, LCP IX (Luxembourg) SCSp, Lexington Global Partners (Lux) Master SCSp, Lexington Global Partners (Lux) SCSp, LCP IX CoInvest Partners B, L.P., LCP IX Leo, L.P., Lexington Capital Partners IX, L.P., Lexington Capital Partners (Ontario), L.P., Lexington Global Partners IX, L.P., Lexington Global Partners VI, L.P., 17 17 E:\FR\FM\13NON1.SGM CFR 200.30–3(a)(12). 13NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 219 (Wednesday, November 13, 2024)]
[Notices]
[Pages 89677-89680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26192]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101520; File No. SR-NASDAQ-2024-064]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Exchange's Anti-Internalization Functionality in Equity 4, 
Rule 4757

November 6, 2024.
    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 October 25, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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 amend the Exchange's anti-internalization 
functionality in Equity 4, Rule 4757.
    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 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 Equity 4, Rule 4757(a)(4) to offer 
increased functionality as it relates to

[[Page 89678]]

anti-internalization. Specifically, the Exchange proposes to (i) allow 
participants that directly submit orders to the System as Members on 
the Exchange and submit orders to the System through Sponsored Access 
\3\ as a Sponsored Participant, to direct that quotes/orders entered 
into the System directly as a Member not execute against quotes/orders 
submitted as a Sponsored Participant; (ii) specify when anti-
internalization will activate; (iii) introduce an anti-internalization 
strategy that uses the strategy of the removing order; and (v) make 
other clarifying changes.
---------------------------------------------------------------------------

    \3\ See General 2, Section 22(a). Sponsored Access shall mean an 
arrangement whereby a member permits its customers to enter orders 
into the System that bypass the member's trading system and are 
routed directly to the Exchange, including routing through a service 
bureau or other third party technology provider.
---------------------------------------------------------------------------

Affiliate Anti-Internalization
    Currently, Equity 4, Rule 4757(a)(4) provides that market 
participants may direct that quotes/orders entered into the System not 
execute against either quotes/orders entered under the same MPID 
(``MPID Level AIQ'') or quotes/orders entered across MPIDs under Common 
Ownership (``Organization Level AIQ'').\4\ In addition, market 
participants using the OUCH order entry protocol may assign to orders 
entered through a specific order entry port a unique group 
identification modifier that will prevent quotes/orders with such 
modifier from executing against each other. Anti-internalization or 
self-match prevention functionality assists participants in reducing 
trading costs from unwanted executions potentially resulting from the 
interaction of executable buy and sell trading interest from the same 
firm.
---------------------------------------------------------------------------

    \4\ For purposes of Equity 4, Rule 4757, the term ``Common 
Ownership'' shall mean participants under 75% common ownership or 
control.
---------------------------------------------------------------------------

    The Exchange proposes to enhance its current self-match prevention 
functionality to allow participants that demonstrate (i) membership on 
the Exchange through which they directly submit orders to the System 
and (ii) participation as a Sponsored Participant whereby they submit 
orders to the System through Sponsored Access, to direct that quotes/
orders entered into the System directly as a Member not execute against 
quotes/orders submitted as a Sponsored Participant (``Affiliate Level 
AIQ'').\5\ The proposed enhancement would be in addition to the other 
levels of self-match prevention offered today. Under the proposed rule 
change, the anti-internalization functionality would continue to be an 
optional feature. If a firm chooses to take advantage of self-match 
prevention, the firm would need to opt-in to the self-match prevention 
functionality, as is the case today.
---------------------------------------------------------------------------

    \5\ The Exchange will require firms requesting to use Affiliate 
Level AIQ to complete an affidavit stating: (i) it is currently a 
Member of the Exchange that submits orders directly to the System, 
and (ii) it also submits orders to the System through a Sponsored 
Access arrangement.
---------------------------------------------------------------------------

    The purpose of this proposed change is to extend self-match 
prevention functionality to prevent transactions between a firm's 
orders submitted directly to the System and through Sponsored Access. 
There are situations where an individual firm would choose to submit 
orders to the Exchange through different mechanisms. For instance, a 
firm may employ different trading strategies across different trading 
desks and choose to send orders for one strategy to the Exchange 
through a direct connection while the other strategy is sent through 
Sponsored Access. The proposed functionality would serve as an 
additional tool that participants may enable in order to assist with 
compliance with the various securities laws relating to potentially 
manipulative trading activity such as wash sales \6\ and self-
trades.\7\ Additionally, the proposed functionality would provide firms 
an additional solution to manage order flow by preventing undesirable 
executions where the firm submits orders in multiple formats (i.e., 
direct connection or Sponsored Access). As is the case with the 
existing risk tools, participants, and not the Exchange, have full 
responsibility for ensuring that their orders comply with applicable 
securities rules, laws, and regulations. Furthermore, as is the case 
with the existing risk settings, the Exchange does not believe that the 
use of the proposed self-match prevention functionality can replace 
participant-managed risk management solutions.
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    \6\ A ``wash sale'' is generally defined as a trade involving no 
change in beneficial ownership that is intended to produce the false 
appearance of trading and is strictly prohibited under both the 
federal securities laws and FINRA rules. See, e.g., 15 U.S.C 
78i(a)(1); FINRA Rule 6140(b) (``Other Trading Practices'').
    \7\ Self-trades are ``transactions in a security resulting from 
the unintentional interaction of orders originating from the same 
firm that involve no change in beneficial ownership of the 
security.'' FINRA requires members to have policies and procedures 
in place that are reasonably designed to review trading activity 
for, and prevent, a pattern or practice of self-trades resulting 
from orders originating from a single algorithm or trading desk, or 
related algorithms or trading desks. See FINRA Rule 5210, 
Supplementary Material .02.
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Anti-Internalization Activation
    The Exchange also proposes to provide that, unless participants 
designate otherwise, for anti-internalization to activate across 
orders, the orders must reflect the same anti-internalization level. 
For example, if an order has designated anti-internalization at an MPID 
level (i.e., quotes/orders entered into the System shall not execute 
against quotes/orders entered under the same MPID), anti-
internalization will only activate against another order designated 
with anti-internalization at an MPID level.
    This is a departure from how anti-internalization activates today. 
Currently, anti-internalization activates across orders with different 
anti-internalization levels. For example, a resting order with MPID 
Level AIQ can have anti-internalization activated against it if an 
incoming order with Organization Level AIQ has the same Organization ID 
as the resting order. With the introduction of Affiliate Level AIQ, the 
anti-internalization levels must match across both orders for anti-
internalization to be activated, in order to prevent erroneous 
activation of anti-internalization.\8\ However, the Exchange proposes 
to preserve current functionality by providing participants with the 
option to elect to have anti-internalization activated against any 
anti-internalization level.
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    \8\ For example, assume Firm 1 accesses the Exchange directly 
and as a Sponsored Participant via Firm 2. Assume Firm 1 sends an 
order as a Sponsored Participant through Firm 2 with Affiliate Level 
AIQ enabled. Assume Firm 2 then sends an order unrelated to Firm 1 
with Organization Level AIQ. If the current behavior prevailed, 
anti-internalization would activate and the orders would not 
execute, resulting in an undesirable outcome.
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``Use Remover'' Strategy
    The Exchange currently provides three versions of self-match 
prevention functionality to allow participants to choose how orders are 
handled in the event of a self-match situation: (1) decrement, (2) 
cancel oldest, and (3) cancel newest. Under the first version 
(``decrement''), if the self-match orders have the same share size, 
both orders will cancel back to the customer. If the orders are not 
equivalent in size, the smaller order will cancel back to the 
originating customer and the larger order will decrement by the size of 
the smaller order. The remaining shares of the larger order will remain 
on the book. Under the second version (``cancel oldest''), the full 
size of the order residing on the book will cancel back to the customer 
if the incoming order would execute against it. The incoming order will 
remain intact with no changes. Under the third version (``cancel 
newest''), the full size of the order coming into the book will cancel

[[Page 89679]]

back to the customer. The resting order will remain intact with no 
changes.
    The Exchange proposes to add a new strategy (``use remover''), 
which would allow for a resting order to use the strategy of the 
removing order. If the use remover strategy is on an order, it will 
only have anti-internalization activated against it when it is the 
resting order and will never trigger anti-internalization against 
another order when it is the incoming order. The Exchange proposes to 
introduce the ``use remover'' strategy in order to maintain existing 
anti-internalization functionality that would otherwise become obsolete 
with the introduction of the default requirement for anti-
internalization activation (i.e., the orders must reflect the same 
anti-internalization level). As described above, currently, anti-
internalization activates across orders with different anti-
internalization levels. Currently, resting orders that have anti-
internalization disabled are still subject to anti-internalization 
functionality, based on the anti-internalization selection of the 
incoming orders. For example, currently, if Firm 1 sends an order with 
anti-internalization disabled and then Firm 2 sends an order with 
Organization Level AIQ with a decrement strategy, anti-internalization 
would activate between the two orders based on the incoming order's 
strategy because of the Organization Level AIQ. Assuming the Firm does 
not designate that anti-internalization activate across quotes/orders, 
the aforementioned example would no longer occur because Affiliate 
Level AIQ necessitates matching anti-internalization levels. The 
Exchange wishes to maintain such functionality as an option for 
participants and introduction of the use remover strategy would allow 
participants to choose to have a resting order use the anti-
internalization strategy of the removing order.
    Taken together, the Exchange believes that the proposed anti-
internalization enhancements would provide participants with more 
tailored self-trade functionality that allows them to manage their 
trading as appropriate based on the participant's business needs.
Clarifying Changes
    Lastly, the Exchange proposes to make several clarifying changes to 
Equity 4, Rule 4757(a)(4) to promote clarity.
    First, the Exchange proposes to codify which strategy prevails when 
anti-internalization strategies differ between two orders. 
Specifically, the Exchange proposes to provide that, when anti-
internalization strategies differ between two orders, the strategy of 
the order removing liquidity will apply and the strategy of the resting 
order will be ignored. This is consistent with current Exchange and 
industry practice.
    In addition, the Exchange proposes to modify the text introducing 
the various anti-internalization strategies to state that, ``In each 
anti-internalization case, as described in this paragraph (4), a market 
participant may elect from the following strategies'', to make it clear 
that any strategy may be selected for each anti-internalization level. 
Relatedly, the Exchange proposes to delete language stating that, ``The 
foregoing options may be applied to all orders entered under the same 
MPID, across MPIDs under Common Ownership, or, in the case of market 
participants using the OUCH order entry protocol, may be applied to all 
orders entered through a specific order entry port.'' The Exchange 
believes that such language is redundant, as the modified introductory 
language makes it clear that the anti-internalization strategies may be 
applied to each anti-internalization level. Finally, the Exchange also 
proposes to add the names of the existing anti-internalization 
strategies (i.e., Decrement, Cancel Oldest, and Cancel Newest) before 
the description of such strategies for clarity.
Implementation
    The Exchange intends to introduce this new functionality by the 
first quarter of 2025. The Exchange will issue an Equities Trader Alert 
to provide notification of the change and relevant date prior to 
introducing the new functionality.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed Affiliate Level AIQ 
functionality promotes just and equitable principles of trade by 
allowing individual firms to better manage order flow and prevent 
undesirable trading activity such as wash sales \11\ or self-trades 
\12\ that may occur as a result of the velocity of trading in today's 
high-speed marketplace. The proposed Affiliate Level AIQ functionality 
does not introduce novel functionality, as the proposed amendment 
extends the current anti-internalization functionality to another 
trading relationship. For instance, a participant may operate trading 
desk 1 that accesses the Exchange via the Member's direct connection, 
as well as trading desk 2 that accesses the Exchange as a Sponsored 
Participant. While these desks may operate different trading 
strategies, a participant may desire to prevent these desks from 
trading versus each other in the marketplace because the orders are 
originating from the same entity. Here, participants may desire anti-
internalization functionality on an Affiliate Level AIQ that will help 
them achieve compliance \13\ with regulatory rules regarding wash sales 
and self-trades in a very similar manner to the way that the current 
anti-internalization functionality applies to existing anti-
internalization levels. The proposed Affiliate Level AIQ functionality 
will also assist participants in reducing trading costs from unwanted 
executions potentially resulting from the interaction of executable buy 
and sell trading interest from the same firm.
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    \11\ Supra note 6.
    \12\ Supra note 7.
    \13\ The Exchange reminds participants that while they may 
utilize anti-internalization to help prevent potential transactions 
such as wash sales or self-trades, participants, not the Exchange, 
are ultimately responsible for ensuring that their orders comply 
with applicable rules, laws, and regulations.
---------------------------------------------------------------------------

    The Exchange believes that the other proposed changes, including 
modifying the default procedure for activating anti-internalization 
while preserving the current functionality as an option for 
participants, adding the use remover strategy, and making clarifying 
changes, also promote just and equitable principles of trade by 
providing participants with more tailored self-trade functionality that 
allows them to manage their trading as appropriate based on the 
participant's business needs and providing clarity and transparency to 
the rules.
    The Exchange also believes that the proposed rule change is fair 
and equitable and is not designed to permit unfair discrimination, in 
accordance with Section 6(b)(5) of the Act,\14\ as use of the proposed 
Affiliate Level AIQ functionality and related features of the proposal 
are optional, and use is not a prerequisite for trading on the 
Exchange.
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    \14\ 15 U.S.C. 78f(b)(5).

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[[Page 89680]]

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. The proposed rule change is 
designed to enhance self-match prevention functionality provided to the 
Exchange's participants and will benefit participants that wish to 
protect their quotes and orders entered into the System directly as a 
Member against trading with quotes/orders submitted as a Sponsored 
Participant. The new functionality is also completely voluntary, and 
members that wish to use the current functionality (or opt out 
altogether) can also continue to do so. The Exchange does not believe 
that providing more flexibility to participants will have any 
significant impact on competition. In fact, the Exchange believes that 
the proposed rule change is evidence of the competitive environment 
where exchanges must continually improve their offerings to maintain 
competitive standing.

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)(iii) of the Act \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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.
---------------------------------------------------------------------------

    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 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 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-NASDAQ-2024-064 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-2024-064. 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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NASDAQ-2024-064 and should 
be submitted on or before December 4, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26192 Filed 11-12-24; 8:45 am]
BILLING CODE 8011-01-P

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