[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66803-66806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28002]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84856; File No. SR-NASDAQ-2018-102]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Order Price Protection

December 19, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 7, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, 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 Order Price Protection or 
``OPP'' within The Nasdaq Options Market LLC (``NOM'') Rules at Chapter 
VI, Section 18, entitled, ``Risk Protections.''
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend Chapter VI, 
Section 18, entitled, ``Risk Protections.'' Specifically, the Exchange 
proposes to amend the Order Price Protection or ``OPP'' functionality 
at Chapter VI, Section 18(a) to: (i) Propose an alternative method to 
determine parameters for this risk protection; and (ii) memorialize 
certain rule text within Chapter VI, Section 18. The Exchage [sic] 
notes that OPP is intended to prevent erroneous executions of orders on 
NOM. This proposal seeks to further this objective by introducting 
[sic] a fixed dollar threshold that in combination with the existing 
percentage threshold will provide a modified approach to order 
rejection based on the price of the order.
Background
    Today, the OPP feature prevents certain day limit, good til 
cancelled or immediate or cancel orders at prices outside of certain 
pre-set limits from being accepted by the System. OPP applies market-
wide to all options, but does not apply to market orders or Intermarket 
Sweep Orders. OPP is operational each trading day after the opening 
until the close of trading, except during trading halts.\3\ The OPP 
assists Participants in controlling risk by checking each order, before 
it is accepted into the System, against certain parameters. Today, OPP 
rejects incoming orders that exceed certain parameters according to the 
following algorithm:
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    \3\ See Chapter VI, Section 18(a)(1).

    (i) If the better of the NBBO or the internal market BBO (the 
``Reference BBO'') on the contra-side of an incoming order is 
greater than $1.00, orders with a limit more than 50% through such 
contra-side Reference BBO will be rejected by the System upon 
receipt.
    (ii) If the Reference BBO on the contra-side of an incoming 
order is less than or equal to $1.00, orders with a limit more than 
100% through such contra-side Reference BBO will be rejected by the 
System upon receipt.

    Today, NOM offers price improving orders \4\ to market participants 
for submitting orders in increments smaller than the minimum price 
variation (``MPV'') and as small as one cent. Price Improving Orders 
are displayed on The Options Price Report Authority (``OPRA'') as part 
of volume at the MPV.
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    \4\ Price Improving Orders are orders to buy or sell an option 
at a specified price at an increment smaller than the minimum price 
variation in the security. Price Improving Orders may be entered in 
increments as small as one cent. Price Improving Orders that are 
available for display shall be displayed at the minimum price 
variation in that security and shall be rounded up for sell orders 
and rounded down for buy orders. See NOM Rules at Chapter VI, 
Section 1(e)(6).
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Alternative Method
    The Exchange proposes to expand the algorithm for OPP to permit an 
alternative to the percentage specified within the current rule. The 
proposal is similar to Nasdaq ISE, LLC's Limit Order Price Protection 
feature.\5\ The Exchange proposes to amend Chapter VI, Section 
18(1)(B)(i) to provide that OPP will reject incoming orders that exceed 
certain parameters according to the following algorithm:
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    \5\ Nasdaq ISE, LLC (``ISE'') provides a Limit Order Price 
Protection feature at Rule 714(b)(1)(A). This risk protection limits 
the amount by which incoming limit orders to buy may be priced above 
the Exchange's best offer and by which incoming limit orders to sell 
may be priced below the Exchange's best bid. Limit orders that 
exceed the pricing limit are rejected. The limit is established by 
the Exchange from time-to-time for orders to buy (sell) as the 
greater of the Exchange's best offer (bid) plus (minus): (i) An 
absolute amount not to exceed $2.00, or (ii) a percentage of the 
Exchange's best bid/offer not to exceed 10%. Limit Order Price 
Protection shall not apply to the Opening Process or during a 
trading halt.

    (i) If the better of the NBBO or the internal market BBO (the 
``Reference BBO'') on the contra-side of an incoming order is 
greater than $1.00, orders with a limit more than the greater of the 
below will cause the order to be rejected by the System upon 
receipt.
    (A) 50% through such contra-side Reference BBO; or
    (B) a configurable dollar amount not to exceed $1.00 through 
such contra-side Reference BBO as specified by the Exchange 
announced via an Options Trader Alert.


[[Page 66804]]


    The Exchange proposes to amend Chapter VI, Section 18(1)(B)(ii) to 
provide that OPP will reject incoming orders that exceed certain 
parameters according to the following algorithm:

    (ii) If the Reference BBO on the contra-side of an incoming 
order is less than or equal to $1.00, orders with a limit more than 
the greater of the below will cause the order to be rejected by the 
System upon receipt.
    (A) 100% through such contra-side Reference BBO; or
    (B) a configurable dollar amount not to exceed $1.00 through 
such contra-side Reference BBO as specified by the Exchange 
announced via an Options Trader Alert.

    Today, orders are rejected if they exceed the percentage threshold 
and in some cases the percentages may be too restrictive. The proposed 
alternative would permit for a range of prices to be executed where the 
incoming order is up to $1.00 from the Reference BBO. The Exchange 
believes that utilizing the greater of a fixed dollar amount 
alternative or percentage would expand the applicability of OPP while 
still providing a reasonable limit to the range where orders will be 
accepted. By implementing a functionality which applies the greater of 
(i) a fixed dollar amount not to exceed $1.00; or (ii) a percentage, 
the Exchange would ensure that this protection would be able to 
accommodate all orders based on a determination of how far from the 
Reference BBO the order is priced. The application of OPP would 
continue to be market-wide. This proposal permits the Exchange to 
consider the price of the order to determine the appropriate threshold 
with which to apply OPP.
    The Exchange notes that ISE's Limit Order Price Protection feature 
combines a percentage and fixed dollar threshold, similar to NOM's 
proposal. The Exchange notes that certain securities in lower price 
ranges would not benefit from the application of a percentage as would 
securities with higher prices. For example, the application of a 50% 
threshold to a $50 security would provide a rejection if a limit order 
was priced $75 or greater compared to a 100% threshold for a $0.02 
security which would be rejected a limit order priced $0.04 or greater.
    Today, the Exchange notes that certain orders, such as the price 
improving orders noted previously, are rejected because a 100% 
percentage is applied to the contra-side of an incoming order that is 
less than $1.00. A rejection occurs in cases where the order is not 
erroneously priced. Below are some additional examples utilizing the 
proposed rule:

Example 2: An option priced less than $1.00

    For a penny MPV option with a BBO on NOM of $0.01 x $0.02, consider 
that the configurable dollar amount is set to $0.05.
    Current Rule: Reject buy orders of more than $0.04 bid if incoming 
order was less than $1.00, and it was more than 100% through the 
contra-side of the Reference BBO.
    Proposed Rule: A buy order priced up to $0.07 ($0.02 offer + $0.05 
configuration) would not be rejected because a configurable dollar 
amount from $0.00 to $0.05 would allow the order to be entered into the 
System for execution.
    This order was marketable upon entry and was not priced far from 
the current bid. The Exchange believes in this example, the order 
should be permitted to trade instead of being rejected.

Example 3: An option priced greater than $1.00

    For a penny MPV option with a BBO on NOM of $1.01 x $1.02, consider 
that the configurable dollar amount is set to $0.60.
    Current Rule: Reject buy orders 50% through $1.02--orders priced 
greater than $1.53 ($1.02 + $0.51).
    Proposed Rule: Reject buy orders priced greater than $1.62-$0.60 
through 1.02 (this would be greater than 50% through 1.02).
    This order was marketable upon entry and was not priced far from 
the current bid. The Exchange believes in this example, the order 
should be permitted to trade instead of being rejected.

Example No. 4: Price Improving Order \6\
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    \6\ The Exchange notes that this particular scenario is not very 
frequent, but may occur on NOM because of the price improving order 
type.

    Today, assume a NOM Participant enters a $.01 offer in an issue 
that is a $0.05 MPV.
    The NOM Order Book would be $0 x $.01 and would be displayed on 
OPRA as $0 x $.05.
    Current Rule: Reject Buy orders 100% through $0.01--orders priced 
greater than $0.02 ($0.01 + $0.01)
    Proposed Rule: Reject buy orders priced greater than $0.06-$0.05 
through $0.01 (this would be greater than 100% through $0.01).
    If a buyer submits a $0.05 order, OPP checks the order against the 
NOM Order Book and assuming a configurable amount of $0.05, this order 
would not reject the the $.05 bid utilizing the proposed fixed dollar 
parameter.
    The desire for this alternative arose specifically in the case 
where the contra-side of an incoming order is less than $1.00, but the 
Exchange believes that an incoming order priced more than $1.00 could 
also benefit by this alternative method because the fixed amount 
provides for additional executions in certain situations where a 
percentage would reject an order which was intentional and not 
erroneous, as displayed in the examples above. The Exchange 
specifically selected a limit of $1.00 because within that range, $1.00 
from the Reference BBO, applying a percentage may cause the System to 
reject a greater number of orders than the Exchange intended. Also, the 
$1.00 equates to 100% through the $1.00 threshold that exists today for 
OPP. The configurable dollar amount would provide more granularity to 
the application of OPP to permit a larger range of orders to execute. 
The Exchange believes that this approach will accomplish the goal of 
limiting erroneous executions while permitting intentional executions 
at reasonable prices.
    The Exchange would continue to analyze trading behavior and its 
experience with OPP to determine the configurable amount not to exceed 
$1.00. The Exchange would post the configurable amount on its website 
and announce any changes to the configurable amount in an Options 
Trader Alert. The Exchange notes that it typically has not changed its 
configurable amounts over the years with respect to its risk 
protections. The Exchange researches market behavior to determine the 
amount in setting risk thresholds, in this case for rejection of 
orders. The Exchange notifies market participants of the thresholds. 
The Exchange would revisit its proposed OPP threshold if there was a 
change in behavior of OPP rejections or in response to market 
participant feedback regarding the behavior of a risk protection.
Memorialization of Rule Text
    A prior rule change \7\ specified that the Exchange is permitted to 
temporarily deactivate OPP from time to time on an intraday basis at 
its discretion if it determined that volatility warranted deactivation. 
Participants would be notified of intraday OPP deactivation due to 
volatility and any subsequent intraday reactivation by the Exchange 
through the issuance of System status messages. The Exchange proposes 
to memorialize the Exchange's discretion within NOM Rules at Chapter 
VI, Section 18(a)(1)(A) by adding the following rule text, ``OPP may be

[[Page 66805]]

temporarily deactivated on an intra-day basis at the Exchange's 
discretion.''
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    \7\ See Securities Exchange Act Release No. 64312 (April 20, 
2011), 76 FR 23351 (April 26, 2011) (SR-NASDAQ-2011-053) (``2011 
Rule Change'').
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Implementation
    The Exchange proposes to implement this rule change prior to March 
2019. The Exchange will announce the date of implementation via an 
Options Traders Alert.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ 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, 
by adopting an alternative configurable dollar amount standard, not to 
exceed $1.00, which would allow NOM to establish appropriate boundaries 
for rejecting potentially erroneous orders while continuing to allow 
Participants to access liquidity.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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Alternative Method
    OPP is intended to prevent orders which were clearly erroneous from 
executing within the System to the detriment of market participants. 
OPP was not intended to reject legitimate orders which are otherwise 
capable of execution at a fair price. The Exchange's proposal would 
allow the Exchange to establish a fixed dollar amount in addition to a 
percentage threshold, similar to ISE,\10\ which would continue to 
protect investors and the public interest against erroneous executions 
while also allowing orders to execute where appropriate at a more 
granular level where the incoming order is $1.00 from the Reference 
BBO.
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    \10\ See note 5 above.
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    Because today NOM offers price improving orders \11\ to market 
participants for submitting orders in increments smaller than the MPV 
and as small as one cent, OPP orders which rely on the Reference BBO on 
the NOM Order Book are rejected because in some cases the price 
improving order appears greater than than [sic] 100% through the 
contra-side Reference BBO of $.01.\12\ The Exchange believes that it is 
consistent with the Act in this case because the order was not entered 
at an erroneous price. The Exchange proposes an alternative to utilize 
a second method to determine the rejection of orders in addition to the 
current OPP methodology for rejecting orders. The Exchange believes 
that by implementing a functionality which applies the greater of (i) a 
fixed dollar amount not to exceed $1.00; or (ii) a percentage, the 
Exchange would ensure that this protection would be able to accommodate 
all orders based on a determination of how far from the Reference BBO 
the order is priced. The application of OPP would continue to be 
market-wide.
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    \11\ See note 4 above.
    \12\ The Exchange notes that this particular scenario is not 
very frequent, but may occur on NOM because of the price improving 
order type.
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    The Exchange believes that its proposal is consistent with the Act 
because the fixed amount provides for a larger range of executions 
within the $1.00 variance which would otherwise be rejected by the 
application of a percentage which would not capture the potential 
incremental executions. Orders would be rejected which were intentional 
and not erroneous. The Exchange specifically selected a limit of $1.00 
because within that range, $1.00 from the Reference BBO, applying a 
percentage may reject a greater number of orders than is intended. The 
Exchange notes that options which are at or near the money with regard 
to the strike and the price of the underlying stock are typically 
priced in a range between $0.0-$2.00.\13\ The Exchange would provide 
market participants with greater flexilibity [sic] to enter orders 
priced near in-the-money ranges. The Exchange will continue to analyze 
trading behavior and its experience with OPP to determine the 
configurable amount not to exceed $1.00. The Exchange would post the 
configurable amount on its website and announce any changes to the 
configurable amount in an Options Trader Alert. The configurable dollar 
amount would provide more granularity to the application of OPP to 
permit a larger range of orders to execute. The Exchange believes that 
this approach will accomplish the goal of limiting erroneous executions 
while permitting intentional executions at reasonable prices.
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    \13\ By way of example, with the current OPP methodology an 
option priced at $1.90 would be rejected for order priced greater 
than $2.85. Whereas the threshold would allow an order priced at 
$2.90 to be submitted to the System for execution.
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Memorialization of Rule Text
    The Exchange's proposal to memorialize rule text which was 
described in the 2011 Rule Change \14\ relating to discretion to 
deactivate OPP on an intraday basis would bring greater transparency to 
the ability of the Exchange to exercise this discretion.
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    \14\ See note 7 above.
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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 proposal does not impose an 
intra-market burden on competition because this mandatory risk 
protection applies to all Participants who submit orders into NOM. The 
Exchange would reject all incoming orders that exceed certain 
parameters uniformly for all Participants. The proposal does not impose 
an inter-market burden on competition because today other markets offer 
similar protections to avoid erroneous executions on their markets.\15\
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    \15\ See ISE 714(b)(1)(A).
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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.

[[Page 66806]]

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

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f381869f96de909c9e9e969d8780b3809690dd949c85"><span class="__cf_email__" data-cfemail="fc8e899099d19f9391919992888fbc8f999fd29b938a">[email protected]</span></a>. Please include 
File Number SR-NASDAQ-2018-102 on the subject line.

Paper Comments

    <bullet> 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-2018-102. 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 (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-102 and should be submitted 
on or before January 17, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-28002 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P


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