Document ID: SEC-2016-0872-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2016-05-20T04:00Z

[Federal Register Volume 81, Number 98 (Friday, May 20, 2016)]
[Notices]
[Pages 31979-31981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11879]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77839; File No. SR-NASDAQ-2016-066]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rule 4703

May 16, 2016.
    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 May 4, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. 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 Rule 4703 (Order Attributes).
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at Nasdaq's principal office, 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. Nasdaq 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
    Nasdaq is proposing to amend Rule 4703(a)(7). This rule currently 
provides that a market participant entering an order using the SCAN 
routing strategy prior to 8:00 a.m. Eastern time (``ET'') may designate 
the order to activate upon entry or at 8:00 a.m. ET. The Exchange 
proposes to extend this functionality to the recently approved Retail 
Order Process (``RTFY'') order routing option.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 76335 (Nov. 3, 
2015), 80 FR 69256 (Nov. 9, 2015) (SR-NASDAQ-2015-112).
---------------------------------------------------------------------------

    The RTFY order routing option is designed to enhance execution 
quality and benefit retail investors by providing price improvement 
opportunities to retail order flow. Previously, retail order firms 
often sent non-marketable order flow, that is--orders that are not 
executable against the best prices available in the market place based 
on their limit price--to post and display on exchanges. Some of the 
orders that have been deemed to be non-marketable by the entering firm 
become marketable by the time the exchange receives them and ultimately 
remove liquidity from the exchange order book. The RTFY routing option 
is an alternative method for posting non-marketable order flow on the 
Exchange order book. Rather than allowing the marketable Designated 
Retail Orders (``DROs'') \4\ to immediately remove liquidity from the 
Exchange order book (unless explicitly instructed to do so), the order 
is routed to destinations in the System routing table \5\ to increase 
price improvement opportunities for the DROs. RTFY may remove liquidity 
from the Exchange book after routing to other destinations. Any non-
marketable RTFY orders will post on the Exchange book.
---------------------------------------------------------------------------

    \4\ See Nasdaq Rule 7018.
    \5\ The term ``System routing table'' refers to the proprietary 
process for determining the specific trading venues to which the 
System routes orders and the order in which it routes them. NASDAQ 
reserves the right to maintain a different System routing table for 
different routing options and to modify the System routing table at 
any time without notice. See NASDAQ Rule 4758(a)(1)(A).
---------------------------------------------------------------------------

    Under the SCAN \6\ routing strategy orders can check the System for 
available shares and simultaneously route the remaining shares to 
destinations on the System routing table. Shares that remain unexecuted 
after routing are posted on the Exchange book. Once on the Exchange 
book, if the order is subsequently locked or crossed by another market 
center, the System will not route the order to the locking or crossing 
market center.
---------------------------------------------------------------------------

    \6\ See Nasdaq Rule 4758(a)(1)(A)(iv).
---------------------------------------------------------------------------

    Currently, RFTY users may enter extended hours orders, which may 
execute, route, or post to the book prior to the beginning of regular 
hours trading. Extended hours orders are accepted starting at 4 a.m. 
ET. SCAN users may also send extended hours orders which are eligible 
for execution, routing, and posting prior to regular market hours 
trading. However, SCAN users may also designate that their extended 
hours orders not activate until 8 a.m. Some market participants 
maintain systems that do not allow executions prior to 8 a.m. The 
Exchange believes this functionality for SCAN orders supports market 
participants by giving them the ability to allow orders to flow through 
to the Exchange while keeping them inactive until 8 a.m.
    The Exchange believes that the market participants who currently 
use this functionality for the SCAN order routing option, as described 
in Nasdaq Rule 4703(a)(7), are similar to the market participants who 
use the new RTFY order routing option. While the users of the SCAN 
routing strategy are diverse, the users of the 8 a.m. activation 
functionality are generally retail focused broker-dealers. RTFY is an 
order routing option designed specifically for DROs in order to provide 
more opportunities for price improvement to individual retail 
investor's orders. Because the firms that choose to utilize the 8 a.m. 
activation feature of SCAN are generally firms that represent retail 
orders, the Exchange believes that it makes sense to provide this 
functionality to the retail firms that make use of the RTFY routing 
option. The Exchange proposes to update the fifth bullet point under 
Nasdaq Rule 4703(a) for consistency as to this point as well.
    The proposed rule change will allow market participants using RTFY 
to benefit by having the added flexibility

[[Page 31980]]

to allow their orders to activate at 8:00 a.m. ET in the same way 
current users of this functionality do with SCAN. Additionally, Nasdaq 
believes that by extending this functionality to the RTFY order routing 
option it will support these market participants as they seek ways in 
which to more efficiently manage the retail order flow that they submit 
to the Exchange.
    The Exchange also proposes to eliminate the final sentence of 
Nasdaq Rule 4703(a)(7), which refers to the term ``ESCN''. ESCN denotes 
an order using the SCAN routing strategy entered prior to 8:00 a.m. ET 
and that is not activated until 8:00 a.m. ET. The inclusion of this 
term is unnecessary and its elimination will simplify the rule and 
lessen potential confusion for market participants regarding this rule.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder, including the 
requirements of Section 6(b) of the Act.\7\ In particular, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \8\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts and practices, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and to perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Nasdaq believes that the proposed rule change promotes just and 
equitable principles of trade, as well as serves to remove impediments 
to and to perfect the mechanism for a free and open market and a 
national market system, and, in general, to protect investors and the 
public interest because it adds flexibility to the recently approved 
RTFY routing option. Specifically, the proposed rule change amends both 
Nasdaq Rule 4703(a)(7) and the fifth bullet point under Nasdaq Rule 
4703(a), which currently apply to the SCAN order routing option, to 
also apply to the new RTFY order routing option as well. This added 
functionality for RTFY will allow market participants using the RTFY 
order routing strategy prior to 8:00 a.m. ET to designate whether their 
RTFY orders will activate upon entry or at 8:00 a.m. ET.
    Nasdaq believes that this additional functionality will allow the 
Exchange to compete more successfully for retail order flow. The 
Exchange bases this upon its determination that the market participants 
who currently use the SCAN order routing option and use this 
functionality are similar to the market participants who use the new 
RTFY order routing option. Nasdaq believes that extending this 
functionality to the RTFY order routing option will assist market 
participants in efficiently managing the order flow that they submit to 
the Exchange.
    This added functionality is an example of different approaches to 
market challenges and is what drives innovation, market quality, and 
ultimately competition. The Exchange competes vigorously for order flow 
in a marketplace where participants have many trading venue choices. 
The Exchange believes making this functionality available to market 
participants using the RTFY routing option will increase competition by 
providing value to retail order firms and their retail investor 
customers, which will in turn result in more order flow being sent to 
the Exchange.
    The Exchange also believes that its proposal to eliminate the final 
sentence of Nasdaq Rule 4703(a)(7) to remove the reference to ``ESCN'' 
serves to promote just and equitable principles of trade and to protect 
investors and the public interest through the elimination of a sentence 
that is unnecessary and unhelpful for market participants. Since ESCN 
denotes an order using the SCAN routing strategy entered prior to 8:00 
a.m. ET and that is not eligible for execution until 8:00 a.m. ET, the 
inclusion of this term is no longer necessary and is unhelpful for 
market participants. The elimination of this sentence will clarify and 
lessen potential confusion for market participants regarding this rule.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The [sic] does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. In fact, the 
Exchange believes that the functionality in Nasdaq Rule 4703(a)(7) 
being made available to market participants using the recently approved 
RTFY order routing strategy will promote competition by providing value 
to retail order firms and their retail investor customers, which will 
in turn result in more order flow being sent to the Exchange. This 
development could enhance competition to the benefit of the markets and 
investors.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has fulfilled 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-NASDAQ-2016-066 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities

[[Page 31981]]

and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-NASDAQ-2016-066. 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 Web site (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 Web site 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 such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-NASDAQ-2016-066 and should be 
submitted on or before June 10, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11879 Filed 5-19-16; 8:45 am]
 BILLING CODE 8011-01-P