Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Anti-Internalization Functionality in Equity 4, Rule 4757, 104249-104252 [2024-30354]
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Federal Register / Vol. 89, No. 245 / Friday, December 20, 2024 / Notices
This Notice will be published in the
Federal Register.
Erica A. Barker,
Secretary.
[FR Doc. 2024–30345 Filed 12–19–24; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101930; File No. SR–BX–
2024–057]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the
Exchange’s Anti-Internalization
Functionality in Equity 4, Rule 4757
December 16, 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 December
4, 2024, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, 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.
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.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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)(A)(3) to offer
increased functionality as it relates to
anti-internalization. The Exchange’s
proposal is identical to the changes
adopted in SR–NASDAQ–2024–064
with the exception of technical
differences in the numbering
convention.3 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 4 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.
Affiliate Anti-Internalization
Currently, Equity 4, Rule
4757(a)(A)(3) 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’’).5 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. Antiinternalization 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.
The Exchange proposes to enhance its
current self-match prevention
functionality to allow participants that
3 See Securities Exchange Act Release No. 101520
(November 6, 2024), 89 FR 89677 (November 13,
2024) (Notice of Filing and Immediate Effectiveness
of File No. SR–NASDAQ–2024–064).
4 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.
5 For purposes of Equity 4, Rule 4757, the term
‘‘Common Ownership’’ shall mean participants
under 75% common ownership or control.
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104249
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’’).6 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.
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 7 and self-trades.8
Additionally, the proposed functionality
would provide firms an additional
solution to manage order flow by
preventing undesirable executions
where the firm submits orders in
6 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.
7 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’’).
8 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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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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Anti-Internalization Activation
The Exchange also proposes to
provide that, unless participants
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.9 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
9 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.
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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
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
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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)(A)(3) 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 antiinternalization 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 (3), 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,10 in general, and furthers the
10 15
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U.S.C. 78f(b).
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objectives of Section 6(b)(5) of the Act,11
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 12 or selftrades 13 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 14 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 self11 15
U.S.C. 78f(b)(5).
note 7.
13 Supra note 8.
14 The 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.
12 Supra
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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,15 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.
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
15 15
PO 00000
U.S.C. 78f(b)(5).
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19(b)(3)(A)(iii) of the Act 16 and
subparagraph (f)(6) of Rule 19b–4
thereunder.17
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 rule-comments@
sec.gov. Please include file number SR–
BX–2024–057 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–BX–2024–057. 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
16 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.
17 17
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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–BX–2024–057 and should be
submitted on or before January 10, 2025.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–30354 Filed 12–19–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[OMB Control No. 3235–0785]
ddrumheller on DSK120RN23PROD with NOTICES1
Submission for OMB Review;
Comment Request; Extension: Rule
18a–10
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for approval of
extension of the previously approved
collection of information provided for in
Rule 18a–10 (17 CFR 240.18a–10),
under the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.).
Exchange Act Rule 18a–10 provides
an alternative compliance mechanism
pursuant to which stand-alone securitybased swap dealers (‘‘SBSDs’’)
registered as a swap dealer that
predominantly engages in a swaps
business, and that meet certain
conditions set forth in the rule, may
elect to comply with the capital, margin,
segregation, recordkeeping, and
reporting requirements of the
Commodity Exchange Act (‘‘CEA’’) and
the U.S. Commodity Futures Trading
18 17
CFR 200.30–3(a)(12).
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Commission’s (‘‘CFTC’’) rules in lieu of
complying with SEC Rules 18a–1, and
18a–3 through 18a–9. Rule 18a–10
requires the firm to provide a written
disclosure to its counterparties after it
begins operating pursuant to the rule.
Furthermore, Rule 18a–10 requires the
firm to immediately notify the
Commission and the CFTC in writing if
it fails to meet a condition in the rule.
There are currently two stand-alone
SBSDs operating pursuant to the
alternative compliance mechanism. The
Commission estimates that these two
stand-alone SBSDs will each spend 5
hours per year updating the disclosure
language required under paragraph
(b)(2) of Rule 18a–10, and that one of
these stand-alone SBSDs will file the
notice with the Commission required
under paragraph (b)(3) of Rule 18a–10,
which will impose a burden of 5
minutes per year. Consequnenty, the
Commission estimates that the total
hour burden under Rule 18a–9 is
approximately 11 hours per year. Since
the last approval of this information
collection, the estimated total burden
hours per year has decreased due to a
decrease in the estimated number of
respondents subject to the requirements
of the Rule and as a result of certain
initial burdens no longer applying.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
Public Comment Instructions: The 30day public comment period for this
information collection request closes at
the end of the day on January 21, 2025.
The public may view the full
information request and submit
comments at https://www.reginfo.gov/
public/do/PRAViewICR?ref_
nbr=202409-3235-002 or email
comments to MBX.OMB.OIRA.SEC_
desk_officer@omb.eop.gov.
Dated: December 16, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–30366 Filed 12–19–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–441, OMB Control No.
3235–0497]
Submission for OMB Review;
Comment Request; Extension: Rule
15c3–4
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
PO 00000
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100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.) (‘‘PRA’’), the
Securities and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for approval of
extension of the previously approved
collection of information provided for in
Rule 15c3–4 (17 CFR 240.15c3–4) (the
‘‘Rule’’) under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.).
Rule 15c3–4 requires certain brokerdealers that are registered with the
Commission as OTC derivatives dealers,
or who compute their net capital
charges under Appendix E to Rule
15c3–1 (17 CFR 240.15c3–1) (‘‘ANC
firms’’), to establish, document, and
maintain a system of internal risk
management controls. In addition,
security-based swap dealers (‘‘SBSDs’’)
must comply with Rule 15c3–4 as if
they were OTC derivatives dealers. The
Rule sets forth the basic elements for an
OTC derivatives dealer, an ANC firm, or
an SBSD to consider and include when
establishing, documenting, and
reviewing its internal risk management
control system, which is designed to,
among other things, ensure the integrity
of an OTC derivatives dealer’s, an ANC
firm’s or an SBSD’s risk measurement,
monitoring, and management process, to
clarify accountability at the appropriate
organizational level, and to define the
permitted scope of the firm’s activities
and level of risk. The Rule also requires
that management of an OTC derivatives
dealer, an ANC firm, or an SBSD must
periodically review, in accordance with
written procedures, the firm’s business
activities for consistency with its risk
management guidelines.
The staff estimates that the average
amount of time a new firm subject to
Rule 15c3–4 will spend establishing and
documenting its risk management
control system is approximately 2,000
hours (666.666667 hours per year when
annualized over three years) and that,
on average, an existing firm subject to
Rule 15c3–4 will spend approximately
200 hours each year to maintain (e.g.,
reviewing and updating) its risk
management control system. Currently,
seventeen firms are required to comply
with Rule 15c3–4. The staff estimates
that approximately six new additional
firms may become subject to the
requirements of Rule 15c3–4 within the
next three years. Thus, the estimated
annual burden would be 3,400 hours for
the seventeen existing firms currently
required to comply with Rule 15c3–4 to
maintain their risk management control
E:\FR\FM\20DEN1.SGM
20DEN1
]]>Agencies
[Federal Register Volume 89, Number 245 (Friday, December 20, 2024)]
[Notices]
[Pages 104249-104252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30354]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101930; File No. SR-BX-2024-057]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Anti-Internalization Functionality in Equity 4, Rule 4757
December 16, 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 December 4, 2024, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to 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)(A)(3) to
offer increased functionality as it relates to anti-internalization.
The Exchange's proposal is identical to the changes adopted in SR-
NASDAQ-2024-064 with the exception of technical differences in the
numbering convention.\3\ 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 \4\ 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.
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\3\ See Securities Exchange Act Release No. 101520 (November 6,
2024), 89 FR 89677 (November 13, 2024) (Notice of Filing and
Immediate Effectiveness of File No. SR-NASDAQ-2024-064).
\4\ 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.
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Affiliate Anti-Internalization
Currently, Equity 4, Rule 4757(a)(A)(3) 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'').\5\ 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.
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\5\ For purposes of Equity 4, Rule 4757, the term ``Common
Ownership'' shall mean participants under 75% common ownership or
control.
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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'').\6\ 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.
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\6\ 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.
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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 \7\ and self-
trades.\8\ Additionally, the proposed functionality would provide firms
an additional solution to manage order flow by preventing undesirable
executions where the firm submits orders in
[[Page 104250]]
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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\7\ 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'').
\8\ 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.\9\ 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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\9\ 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
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)(A)(3) 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 (3), 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,\10\ in general, and furthers the
[[Page 104251]]
objectives of Section 6(b)(5) of the Act,\11\ 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.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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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 \12\ or self-trades
\13\ 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 \14\ 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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\12\ Supra note 7.
\13\ Supra note 8.
\14\ 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.
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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,\15\ 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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\15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
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 \16\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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\16\ 15 U.S.C. 78s(b)(3)(A)(iii).
\17\ 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.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is 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-BX-2024-057 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-BX-2024-057. 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
[[Page 104252]]
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-BX-2024-057 and should be submitted on or before January 10, 2025.
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\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-30354 Filed 12-19-24; 8:45 am]
BILLING CODE 8011-01-P
