Document ID: SEC-2023-0018-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2023-01-10T05:00Z

[Federal Register Volume 88, Number 6 (Tuesday, January 10, 2023)]
[Notices]
[Pages 1438-1443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00209]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96600; File No. SR-NASDAQ-2022-079]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rules 4702(b)(14) and 
(b)(15) Concerning Dynamic M-ELO Holding Periods

January 4, 2023.
    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 21, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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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 Rules 4702(b)(14) and (b)(15) of the 
Exchange's Rulebook to replace the static holding period requirements 
for Midpoint Extended Life Orders and Midpoint Extended Life Orders 
Plus Continuous Book with dynamic holding periods.
    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

[[Page 1439]]

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 Rules 4702(b)(14) and (15) of the 
Exchange's Rulebook to replace the static 10 millisecond holding period 
requirements for its Midpoint Extended Life Order (``M-ELO'') and 
Midpoint Extended Life Order Plus Continuous Book (``M-ELO+CB'') Order 
Types with dynamic holding periods (``Dynamic M-ELO and M-ELO+CB'' or 
collectively, ``Dynamic M-ELO'').
Background
    In 2018, the Exchange introduced the M-ELO, which is a Non-
Displayed Order priced at the Midpoint between the National Best Bid 
and Offer (``NBBO'') and which is eligible for execution only against 
other eligible M-ELOs and only after a minimum of one-half second 
passes from the time that the System accepts the order (the ``Holding 
Period'').\3\ In 2019, the Exchange introduced the M-ELO+CB, which 
closely resembles the M-ELO, except that a M-ELO+CB may execute at the 
midpoint of the NBBO, not only against other eligible M-ELOs (and M-
ELO+CBs), but also against Non-Displayed Orders with Midpoint Pegging 
and Midpoint Peg Post-Only Orders (``Midpoint Orders'') that rest on 
the Continuous Book for at least one-half second and have Trade Now 
enabled.\4\
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    \3\ See Securities Exchange Act Release No. 34-82825 (March 7, 
2018), 83 FR 10937 (March 13, 2018) (SR-NASDAQ-2017-074) (``M-ELO 
Approval Order'').
    \4\ See Securities Exchange Act Release No. 34-86938 (September 
11, 2019), 84 FR 48978 (September 17, 2019) (SR-NASDAQ-2019-048) 
(``M-ELO+CB Approval Order'').
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    When the Exchange designed M-ELO, it originally set the length of 
the Holding Period at one-half second because it determined that this 
time period would be sufficient to ensure that likeminded investors 
would interact only with each other, and with minimal market impacts. 
The Exchange believed that the longer length of the M-ELO Holding 
Period and its simplicity in design would provide greater protection 
for participants than they could achieve through competing delay 
mechanisms.
    In 2020, however, the Exchange shortened the length of the Holding 
Period to 10 milliseconds.\5\ The Exchange did so after studying two 
years of actual use and performance of M-ELOs, as well as customer 
feedback. That is, the Exchange came to understand that, while users of 
M-ELO and M-ELO+CB are less concerned with achieving rapid executions 
of their Orders than are other participants, they are not indifferent 
about the length of time in which their M-ELOs and M-ELO+CBs must wait 
before they are eligible for execution. Indeed, participants informed 
the Exchange that in certain circumstances, such as when they sought to 
trade symbols that on average had a lower time-to-execution than a 
half-second, they were reticent to enter M-ELOs or M-ELO+CBs. They 
indicated that the associated Holding Periods for these Order Types 
were longer than necessary to achieve the desired protections and that, 
during the residual portion of the Holding Periods, they risked losing 
out on favorable execution opportunities that would otherwise be 
available to them had they placed a non-MELO order.
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    \5\ See Securities Exchange Act Release No. 34-88743 (April 24, 
2020), 85 FR 24068 (April 30, 2020) (SR-NASDAQ-2020-011) (``M-ELO 
Timer Approval Order'').
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    Based upon this feedback, the Exchange studied the potential 
effects of reducing the length of the Holding Periods for both M-ELOs 
and M-ELO+CBs (as well as for Midpoint Orders that would execute 
against M-ELO+CBs). Ultimately, the Exchange determined that it could 
reduce the Holding Periods to 10 milliseconds without compromising the 
protective power that M-ELO and M-ELO+CB are intended to provide to 
participants and investors.\6\ Thus, the Exchange determined that 
shortening the Holding Periods to 10 milliseconds for M-ELOs and M-
ELO+CBs would increase the efficacy of the mechanism while not 
undermining the power of those Order Types to fulfill their underlying 
purpose of minimizing market impacts. At the same time, the Exchange 
determined that a reduction in the Holding Periods to 10 milliseconds 
would dramatically add to the circumstances in which M-ELOs and M-
ELO+CBs would be useful to participants. In its M-ELO Timer Approval 
Order, the Commission agreed with the Exchange:
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    \6\ The Exchange examined each of its historical M-ELO 
executions to determine at what Midpoints of the NBBO the M-ELOs 
would have executed if their Holding Periods had been shorter than 
one-half second (500 milliseconds). After examining the historical 
effects of shorter Holding Periods of between 10 milliseconds and 
400 milliseconds, the Exchange determined that a reduction of the M-
ELO Holding Period to as short as 10 milliseconds would have caused 
an average impact on markouts of only 0.10 basis points (across all 
symbols). In other words, compared to the execution price of an 
average M-ELO with a one-half second Holding Period, the Exchange 
found that a M-ELO with a 10 millisecond Holding Period would have 
had an average post-execution impact that was only a tenth of a 
basis point per share--a difference in protective effect that is 
immaterial. See Nasdaq, ``The Midpoint Extended Life Order (M-ELO); 
M-ELO Holding Period,'' available at https://www.nasdaq.com/articles/the-midpoint-extended-life-order-m-elo%3A-m-elo-holding-period-2020-02-13 (analyzing effects of shortened Holding Periods on 
M-ELO performance).

    The Commission notes that, with the proposed ten-millisecond 
Holding Period and Resting Period, M-ELOs and M-ELO+CBs would 
continue to be optional order types that are available to investors 
with longer investment time horizons, including institutional 
investors. The Commission also believes that the proposal could make 
M-ELOs and M-ELO+CBs more attractive for securities that on average 
have a time-to-execution of less than one-half second and, for 
investors who currently do not use M-ELOs and M-ELO+CBs for these 
securities, provide optional order types that could enhance their 
ability to participate effectively on the Exchange. The Commission 
notes that, if market participants determine that the proposal would 
make M-ELOs and M-ELO+CBs less attractive for their particular 
investment objectives, such market participants may elect to reduce 
or eliminate their use of these optional order types. Moreover, as 
noted above, the Exchange will continue to conduct real-time 
surveillance to monitor the use of M-ELOs and M-ELO+CBs to ensure 
that such usage remains appropriately tied to the intent of the 
order types. If, as a result of such surveillance, the Exchange 
determines that the shortened Holding Period does not serve its 
intended purpose or adversely impacts market quality, the Exchange 
would seek to make further recalibrations.\7\
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    \7\ M-ELO Timer Approval Order, supra, at 85 FR 24069.

    For similar reasons and with even better potential results for 
participants, the Exchange now proposes to further refine the length of 
the Holding Periods for M-ELOs and M-ELO+CBs, this time through the 
application of innovative and patent pending machine learning 
technology.
Dynamic M-ELO
    After receiving feedback from participants that even 10 millisecond 
Holding Periods for M-ELO and M-ELO+CB may, at times, exceed what is 
necessary to accomplish the underlying intent of these Order Types, the 
Exchange began to experiment with making further refinements to the 
duration of the Holding Periods. Ultimately, the Exchange concluded 
that shorter Holding Periods could achieve the same, if not better 
results for participants in terms of mark-outs, but not in all 
circumstances. That is, where prices of the underlying securities are

[[Page 1440]]

stable, and not subject to imminent unfavorable changes, M-ELOs and M-
ELO+CBs face lower risks of confronting spread-crossing orders, such 
that shorter Holding Periods could suffice to protect M-ELOs and M-
ELO+CB from such orders. In periods of heightened price volatility, 
however, M-ELOs and M-ELO+CBs also face heightened risks, such that 
longer Holding Periods would continue to be beneficial in protecting M-
ELOs and M-ELO+CBs from such risks. Thus, the Exchange determined that 
another across-the-board reduction of the static 10 millisecond Holding 
Periods would be sub-optimal because it could impact the performance of 
the M-ELO and M-ELO+CB Order Types during periods of heightened 
volatility.
    In light of these observations, the Exchange tasked its artificial 
intelligence and machine learning laboratory (the ``AI Core Development 
Group'') to explore whether it could employ these innovative 
technologies to optimize the length of M-ELO and M-ELO+CB Holding 
Periods during various states of price volatility, and then to vary the 
lengths of the Holding Periods dynamically during the lifecycles of M-
ELOs and M-ELO+CBs, with the objectives of improving the performance of 
these Order Types while also further reducing opportunity costs.
    As the Exchange explains in greater depth in the attached white 
paper,\8\ the AI Core Development Group proceeded to develop an 
artificial intelligence-based timer control system that will achieve 
these objectives.\9\ The AI Core Development Group did so by using 
reinforcement learning techniques--machine learning paradigms which 
develop optimal solutions to problems over time by taking actions to 
solve them, generating feedback on the results of such actions, 
applying that feedback to direct and improve the next round of 
solutions, and then repeating the feedback loop until the paradigm 
achieves optimized solutions.
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    \8\ See Diana Kafkes et al., ``Applying Artificial Intelligence 
& Reinforcement Learning Methods Towards Improving Execution 
Outcomes,'' SSRN, October 19, 2022, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4243985 (attached hereto 
as Exhibit 3) (the ``White Paper'').
    \9\ Although the AI Core Development Group acknowledges that an 
optimal Holding Period would update with every incoming order, it 
determined that training a reinforcement learning model on every 
order would be too difficult to program and too difficult to 
implement given the nanosecond latency requirements of the Exchange. 
The Group then investigated more feasible update cadences and 
determined the point at which optimal outcomes were best balanced 
with the level of programming and implementation difficulty to be 
between 15 and 30 second updates. Ultimately, the Group chose a 30 
second update cadence to give the model the greatest opportunity to 
learn between potential actions.
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    In this instance, the AI Core Development Group applied 
reinforcement learning techniques to a simulation of the M-ELO Book 
that it constructed using a representative data set from the first 
quarter of 2022 (the ``Training Period''). The Training Period data 
consisted of 380 out of the 6,257 symbols on the M-ELO Book (accounting 
for approximately 67 percent of M-ELO volume). The symbols chosen 
reflect both actively-traded and thinly-traded securities, and both 
low-priced and high-priced securities.
    The AI Core Development Group then developed a machine learning 
model with more than 140 features \10\ and applied it to the Training 
Period data. The Group programmed the model to value the achievement of 
higher fill rates or lower mark-outs than that which occurred in a 
historical simulation of M-ELOs and M-ELO+CBs involving the Training 
Period data.\11\ The Group then programmed the model to seek to achieve 
its goals by taking one of five possible actions with respect to the 
duration of the Holding Periods at 30 second intervals \12\ for each 
symbol during each trading day of the Training Period. That is, at each 
30 second internal, the model evaluated market conditions for each 
symbol over the prior 30 second period and either kept the Holding 
Periods the same, increased/decreased them by 0.25 milliseconds, or 
increased/decreased them by 0.50 milliseconds.\13\ After each decision-
making round, the model utilized the results to inform its actions at 
the next 30 second increment.
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    \10\ See White Paper, supra, at 31, for a description of these 
features.
    \11\ As the White Paper explains, the Group developed a model to 
simulate activity on the Exchange involving M-ELOs and M-ELO+CBs 
during the Training Period. See White Paper, supra, at 10.
    \12\ See id.
    \13\ The AI Core Development Group experimented with a range of 
permissible Holding Period durations. Ultimately, it concluded that 
it could produce better outcomes for M-ELO and M-ELO+CB participants 
than the existing approach using Holding Periods as low as 0.25 
milliseconds and as high as 2.5 milliseconds, under normal market 
conditions.
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    In making its decisions, the model considered 142 categories of 
data points. A confluence of data points that correlated with an 
increase in volatility tended to cause the model to increase the 
durations of Holding Periods, including increases in the standard 
deviation of NBBO prices, the number of unique participants placing 
sell orders on M-ELO and M-ELO+CB, and the volume-weighted average of 
the NBBO spread. Conversely, a confluence of data points that 
correlated with greater price stability tended to cause the model to 
decrease the durations of Holding periods, such as an increase in the 
median and max number of shares per trade and the number of resting 
bids left in the M-ELO and M-ELO+CB Book.
    The AI Core Development Team produced variations of its model that 
prioritized achievement of the lowest mark-outs, the highest fill 
rates, and a blend of these two objectives.\14\ Through a process of 
learning and experimentation, the AI Core Development Group settled on 
a Dynamic M-ELO model that achieved substantial performance 
improvements for users of M-ELO and M-ELO+CB--both in terms of markouts 
and fill rates--as compared to the static 10 millisecond Holding 
Periods. As the White Paper explains in greater detail, Dynamic M-ELO 
yielded an average combined volume-weighted improvement of 31.7 
percent, including a 20.3 percent increase in fill rates and a 11.4 
percent reduction in mark-outs.\15\ The White Paper provides a more 
fulsome explanation of these improvements.\16\
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    \14\ The AI Core Development Group also applied to the model a 
paradigm called ``retraining'' to combat the degradation of model 
performance that can otherwise occur as the reference data it uses 
for initial comparison becomes stale. Finally, the AI Core 
Development group added a stability protection mechanism to the 
model to provide maximum production to participants in the event 
that the model observes extraordinary levels of instability in the 
National Best Bid and Offer during the prior three seconds as 
compared to reference data. When the model detects such instability, 
it is programmed to increase the length of the Holding Period to 12 
milliseconds for a period of 750 milliseconds.
    \15\ See White Paper, supra, at 22.
    \16\ See id.
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    Based upon these exciting results, the Exchange now proposes to 
amend Rule 4702(b)(14) and (15) to replace the static 10 millisecond 
timers applicable to M-ELO and M-ELO+CB with Dynamic M-ELO Holding 
Periods. Using the Exchange's proprietary and patent pending 
technology, the Dynamic M-ELO system will evaluate and, as it deems 
necessary, adjust the length of the Holding Periods for each symbol 
comprising M-ELOs and M-ELO+CBs (and Midpoint Orders on the Continuous 
Book that opt to interact with M-ELO+CBs after resting on the Book) 
every 30 seconds throughout the Market Hours (each such 30 second 
interval, a ``Change Event''). In so doing, Dynamic M-ELO will help 
participants to achieve a more optimized blend of the underlying 
purposes of the M-ELO

[[Page 1441]]

and M-ELO+CB Order Types: protection against adverse selection (low 
mark-outs) without sacrificing opportunities to achieve high-quality 
executions (high fill rates).
    A proposed M-ELO or M-ELO+CB with a Dynamic Holding Period will 
operate as follows. At the outset of Market Hours (approximately 
9:30:00 a.m.), the Exchange will impose initial Holding Periods of 1.25 
milliseconds for M-ELOs and M-ELO+CBs in all symbols. Thereafter, 
Holding Periods for a given symbol will become eligible to change 
dynamically from the initial duration beginning at 9:30:30AM and then 
at 30 second intervals thereafter during Market Hours. The Exchange 
will then apply to the M-ELO or M-ELO+CB Order a Holding Period that is 
of the duration that prevailed at the time of entry. For example, if 
participant A enters a M-ELO for symbol XYZ at 9:30:25 a.m., then 
Holding Period for that M-ELO will be 1.25 milliseconds. If at 
9:30:30:00 a.m., the System decides to lower the duration of the 
Holding Period by 0.50 milliseconds, and then participant B enters a M-
ELO for symbol XYZ at 9:30:45 a.m., then the System will assign a 0.75 
millisecond Holding Period to participant B's M-ELO. To be clear, the 
System will determine Dynamic M-ELO Holding Periods independently for 
M-ELOs and M-ELO+CBs in each symbol.
    During normal market conditions, the range of potential Holding 
Period durations for M-ELOs and M-ELO+CBs will be between 0.25-2.50 
milliseconds, with the Holding Period duration being eligible to change 
by increments of either 0.25 or 0.50 milliseconds at each Change Event. 
Thus, if the Holding Period for a M-ELO in symbol XYZ is set at 0.75 
milliseconds at 2:22:11 p.m., and at 2:22:41 p.m., the System 
determines to increase the duration of the Holding Period, it may do so 
only by 0.25 or 0.50 milliseconds during that event.
    When a Change Event occurs, and the System determines to adjust the 
duration of a Holding Period for a symbol, that adjustment will apply, 
not only to all M-ELOs and M-ELO+CBs for that symbol entered within the 
30 second period after the Change Event occurs, but also to M-ELOs and 
M-ELO+CBs entered prior to the Change Event with unexpired Holding 
Periods (with applicability retroactive to the time of Order 
acceptance). Thus, if a participant enters a M-ELO in symbol XYZ at 
1:14:299 p.m., and the prevailing Holding Period applicable to that M-
ELO is 2 milliseconds, and at 1:14:30 p.m., the System modifies the 
Holding Period to be 1.5 milliseconds, then the M-ELO will become 
eligible to execute at 1:14:3005 p.m. This is the case because the M-
ELO will have already expended 1 millisecond of its Holding Period as 
of the time of the Change Event; thereafter, the M-ELO will need to 
rest only another 0.5 milliseconds to become eligible to execute under 
the new 1.5 millisecond Holding Period (as measured from 1:14:299 
p.m.). This last feature ensures that the M-ELO Book maintains time 
priority among M-ELOs and M-ELO+CBs in a dynamic environment. That is, 
it ensures that no M-ELO or M-ELO+CB with an unexpired Holding Period 
at the time of a Change Event will end up becoming eligible to execute 
later than a M-ELO entered after the Change Event which has a shorter 
Holding Period applicable to it.
    If at any time, the System detects extraordinary instability in a 
symbol, then the System will activate a ``stability protection 
mechanism'' to provide an extra layer of protection to M-ELO and M-ELO 
users from the heightened risks of adverse selection that exists during 
such periods of instability.\17\ The stability protection mechanism 
will override the prevailing Holding Periods for M-ELOs and M-ELO+CBs 
in a symbol experiencing extraordinary instability and immediately 
increase the duration of those Holding Periods to 12 milliseconds for a 
period of 750 milliseconds. The System may activate the stability 
protection mechanism even between Change Events. The System will 
evaluate, at each NBBO update, whether market conditions remain 
extraordinarily unstable and, if so, it will restart the 750 
millisecond Stability Protected Period and maintain the 12 millisecond 
Holding Period until conditions stabilize. Once the System determines 
that market conditions have stabilized (i.e., all measurements for the 
symbol are at or below the threshold value throughout the duration of 
the prevailing Stability Protected Period), the System will revert the 
duration of the Holding Periods to that which prevailed as of the 
Change Event that occurred immediately prior to the activation of the 
stability protection mechanism or, if the stability protection 
mechanism was active when a Change Event occurred, to the duration 
selected at the immediately preceding Change Event. The System will 
then proceed to reevaluate the duration of the Holding Periods as per 
the regular schedule of Change Events.
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    \17\ For purposes of this Rule, the System determines that 
``extraordinary instability'' for a symbol exists through 
observations it makes following every change in the NBBO for that 
symbol that occurs during the trading day. When the NBBO changes, 
the System looks back at the prior three seconds of trading and 
measures the difference between the highest and the lowest NBBO 
midpoint values that occurred during that period, and then it 
compares that measurement to a threshold value for the symbol. The 
System concludes that extraordinary instability exists for a symbol 
if the measurement exceeds the threshold value.
     The threshold value for a symbol, in turn, is the difference 
between the highest and the lowest NBBO midpoint values for the 
symbol that, if applied to its trading activity during the prior 
trading day, would have caused the System to deem trading in the 
symbol to be extraordinarily unstable for as close to one percent of 
that day as possible.
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    The following is an illustration of the operation of the stability 
protection mechanism. At 11:10:04 a.m., the prevailing Holding Period 
for M-ELOs in symbol XYZ is 1.5 milliseconds. At the same time, the 
NBBO for symbol XYZ updates. The System looks back at the prior three 
seconds of trading in symbol XYZ and finds that during that period, the 
highest observed NBBO midpoint was $10.05, and the lowest was $10.00, 
such that the difference between these two values is a range of $0.05. 
The System then looks back at trading behavior for symbol XYZ during 
the immediately preceding trading day. In doing so, the System 
calculates the value of the threshold that would have caused the symbol 
to be deemed extraordinarily unstable for one percent of the trading 
day; the System determines that this threshold value is a range of 
$0.03. The System then compares the $0.03 threshold to its measurement 
of the prior three seconds of NBBO changes ($0.05), and concludes that 
over these past three seconds, the symbol is extraordinarily unstable. 
Accordingly, the System activates the stability protection mechanism 
and the Holding Period for M-ELOs in symbol XYZ immediately increases 
to 12 milliseconds for a period of 750 milliseconds. However, 5 
milliseconds after the Stability Protection Period commences, the NBBO 
updates again, thus prompting the System to repeat its assessment of 
the stability of the symbol in light of the update. This reassessment 
reveals that the symbol remains unstable, such that a new Stability 
Protection Period of 750 milliseconds begins at that time (overriding 
the pre-existing Period). Over the course of this new Stability 
Protection Period, the NBBO shifts two more times, but each of the 
ensuing reassessments indicate that the NBBO ranges for the symbol have 
fallen below the $0.03 threshold. The Stability Protection Period 
elapses 750 milliseconds after it began with the symbol remaining 
stable. Thus, the Holding Period reverts to 1.5 milliseconds.
    If the Exchange halts trading in a symbol, then upon resumption of

[[Page 1442]]

trading, any new M-ELO or M-ELO+CB in that symbol and any pending M-ELO 
or M-ELO+CB in that symbol with an unexpired Holding Period will be 
subject to a new 12 milliseconds Holding Period (running from the time 
when trading resumes) until the next scheduled Change Event, at which 
point the System may determine to adjust that Holding Period to a 
duration within the range applicable under normal market 
conditions.\18\ If, however, the System determines that extraordinary 
instability in the symbol exists, it may instead determine to activate 
the stability protection mechanism and maintain the duration of the 
Holding Period at 12 milliseconds for another 750 milliseconds. This 
design will help to ensure that M-ELOs and M-ELO+CBs receive added 
protection coming out of halt conditions.\19\
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    \18\ Prior to commencement of a new 12 millisecond Holding 
Period for a new or pending M-ELO or M-ELO+CB following a Halt, the 
System will first determine whether the M-ELO or M-ELO+CB is or 
remains eligible for execution. That is, the Holding Period will 
commence only if, upon commencement of trading following the Halt, 
the midpoint price for the Order is within the limit set by the 
participant. If not, the System will hold the Order until the 
midpoint falls within the limit set by the participant, at which 
time the 12 millisecond Holding Period will commence.
    \19\ Also as a safeguard, the System will apply a default 
Holding Period of 12 milliseconds to a M-ELO or M-ELO+CB if ever it 
fails to receive a signal during a Change Event as to whether the 
System should adjust or maintain the duration of the prevailing 
Holding Period. The System will continue to apply the default 12 
millisecond Holding Period until the next Change Event where the 
signal is restored and the System is able to act dynamically again.
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    The Exchange notes that same dynamic process described above will 
also apply to and govern the time periods during which Midpoint Orders 
on the Continuous Book must rest before they will become eligible to 
interact with M-ELO+CBs (provided that participants have opted for 
their Midpoint Orders to interact with M-ELO+CBs). Thus, the same 
Holding Period duration that the System sets for a M-ELO+CB in a symbol 
during Regular Market Hours will also be the length of time that a 
Midpoint Order must rest on the Continuous Book must rest before it may 
interact with a M-ELO+CB.
    Apart from these impacts of Dynamic Holding Periods, M-ELOs and M-
ELO+CBs will continue to behave as they do now in all respects, and as 
set forth in Rules 4702(b)(14) and (15).
    It is important to note that within the parameters discussed herein 
and in the White Paper, the Exchange will continue to re-train Dynamic 
M-ELO and M-ELO+CB regularly so that the model will continue to learn 
from and act upon the basis of new data, and further improve its 
performance over time. However, the Exchange will not modify the 
underlying structure of Dynamic M-ELO and M-ELO+CB without first 
obtaining the Commission's approval to do so, including modifications 
to the conditions under which the model will adjust the duration of 
Holding Periods, the frequency with which the model my adjust the 
Holding Periods, and the range of Holding Period durations available to 
M-ELOs and M-ELO+CBs.\20\
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    \20\ In addition to the proposed changes described above, the 
Exchange proposes to delete an extraneous reference in Rule 
4702(b)(15) to M-ELO+CB being eligible to execute against a Midpoint 
Order on the Continuous Book if the Continuous Book order has the 
``Midpoint'' Trade Now Attribute enabled. In a prior filing, the 
Exchange folded the concept of ``Midpoint Trade Now'' into the 
general ``Trade Now'' Attribute. See Securities Exchange Act Release 
No. 34-92180 (June 15, 2021), 86 FR 33420 (June 24, 2021)(SR-NASDAQ-
2021-044).
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Implementation
    The Exchange intends to make the proposed change effective for M-
ELOs and M-ELO+CBs in the Second or Third Quarter of 2023, but that 
time frame is subject to change. The Exchange will publish a Trader 
Alert in advance of making the proposed change effective.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\21\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\22\ 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 allowing for more widespread use of M-ELOs and M-ELO+CBs.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
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    When the Commission approved the M-ELO and the M-ELO+CB, it 
determined that these Order Types are consistent with the Act because 
they ``could create additional and more efficient trading opportunities 
on the Exchange for investors with longer investment time horizons, 
including institutional investors, and could provide these investors 
with an ability to limit the information leakage and the market impact 
that could result from their orders.'' \23\ Nothing about the 
Exchange's proposal should cause the Commission to revisit or rethink 
this determination. Indeed, the proposal will not alter the fundamental 
design of these Order Types, the manner in which they operate, or their 
effects.
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    \23\ M-ELO Approval Order, supra 83 FR at 10938-39; M-ELO+CB 
Approval Order, supra, 84 FR at 48980.
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    Even with Dynamic M-ELO Holding Periods, M-ELOs and M-ELO+CBs will 
continue to provide their users with protection against information 
leakage and adverse selection--and they will do so at levels which are 
substantially undiminished from that which they provide now.\24\
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    \24\ See note 6, supra.
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    At the same time, however, the proposal will benefit market 
participants and investors by reducing the opportunity costs of 
utilizing M-ELOs and M-ELO+CBs. The proposal, in other words, will re-
calibrate the lengths of the Holding Periods so that M-ELOs and M-
ELO+CBs will operate in the ``Goldilocks'' zone--their Holding Periods 
will not be so short as to render them unable to provide meaningful 
protections against information leakage and adverse selection, but the 
Holding Periods also will not be too long so as to cause participants 
and investors to miss out on favorable execution opportunities. Nasdaq 
believes the proposal will render M-ELOs and M-ELO+CBs more useful and 
attractive to market participants and investors, and this increased 
utility and attractiveness, in turn, will spur an increase in M-ELO and 
M-ELO+CB use cases on the Exchange, both from new and existing users of 
M-ELOs and M-ELO+CBs. Ultimately, the proposal should enhance market 
quality by increasing opportunities for midpoint executions on the 
Exchange.
    The Exchange notes that use of Dynamic M-ELOs and M-ELO+CBs remains 
voluntary for all market participants. Accordingly, if any market 
participant feels that the dynamic Holding Periods are still too long 
or too short or because competing venues offer more attractive delay 
mechanisms, then the participants are free to pursue other trading 
strategies or utilize other trading venues. They need not utilize 
Dynamic M-ELOs or M-ELO+CBs.
    Finally, the Exchange notes that it will continue to conduct real-
time surveillance to monitor the use of M-ELOs and M-ELO+CBs to ensure 
that such usage remains appropriately tied to the intent of the Order 
Types. If, as a result of such surveillance, the Exchange determines 
that the Dynamic M-ELO Holding Periods do not serve their intended 
purposes, or adversely impact market quality, then the Exchange will 
seek to make further re-calibrations.

[[Page 1443]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the Exchange 
believes that this proposal will promote the competitiveness of the 
Exchange by rendering its M-ELO and M-ELO+CB Order Types more 
attractive to participants.
    The Exchange adopted the M-ELO and M-ELO+CB as pro-competitive 
measures intended to increase participation on the Exchange by allowing 
certain market participants that may currently be underserved on 
regulated exchanges to compete based on elements other than speed. The 
proposed change continues to achieve this purpose. With Dynamic M-ELO 
Holding Periods, both M-ELOs and M-ELO+CBs will afford their users with 
a level of protection from information leakage and adverse selection 
that is better from what is achievable at present.\25\ At the same 
time, the Dynamic Holding Periods will increase opportunities to 
interact with other like-minded investors with longer time horizons 
while also lowering the opportunity costs for participants that utilize 
M-ELOs and M-ELO+CBs, particularly for securities that trade within the 
``Goldilocks'' zone. In sum, the proposed changes will not burden 
competition, but instead may promote competition for liquidity in M-
ELOs and M-ELO+CBs by broadening the circumstances in which market 
participants may find such Orders to be useful. With the proposed 
changes, market participants will be more likely to determine that the 
benefits of entering M-ELOs and M-ELO+CBs outweigh the risks of doing 
so.
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    \25\ See White Paper, supra.
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    The proposed change will not place a burden on competition among 
market venues, as any market may adopt an order type that operates 
similarly to a M-ELO or a M-ELO+CB with Dynamic M-ELO Holding Periods.

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

    No written comments were either solicited or received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days of such 
date (i) as the Commission may designate if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the Exchange consents, the Commission shall: (a) by order 
approve or disapprove such proposed rule change, or (b) institute 
proceedings to determine whether the proposed rule change should be 
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 [email protected]. Please include 
File Number SR-NASDAQ-2022-079 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2022-079. 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 edit personal identifying information 
from comment submissions. You should submit only information that you 
wish to make available publicly. All submissions should refer to File 
Number SR-NASDAQ-2022-079 and should be submitted on or before January 
31, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00209 Filed 1-9-23; 8:45 am]
BILLING CODE 8011-01-P