Document ID: SEC-2018-0405-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2018-03-13T04:00Z

[Federal Register Volume 83, Number 49 (Tuesday, March 13, 2018)]
[Notices]
[Pages 10937-10941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04979]

[[Page 10937]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82825; File No. SR-NASDAQ-2017-074]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendment No. 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, 
and 3, To Adopt the Midpoint Extended Life Order

March 7, 2018.

I. Introduction

    On July 21, 2017, The Nasdaq Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt the Midpoint Extended Life Order 
(``MELO''). The proposed rule change was published for comment in the 
Federal Register on August 9, 2017.\3\ On August 9, 2017, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ On September 21, 
2017, pursuant to Section 19(b)(2) of the Act,\5\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to approve or disapprove the proposed rule 
change.\6\ The Commission initially received three comment letters on 
the proposed rule change.\7\ On October 30, 2017, the Exchange filed 
Amendment No. 2 to the proposed rule change.\8\ On November 3, 2017, 
the Commission published notice of Amendment No. 2 and instituted 
proceedings under Section 19(b)(2)(B) of the Act \9\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment Nos. 1 and 2.\10\ The Commission received one additional 
comment letter on the proposed rule change in response to the Order 
Instituting Proceedings.\11\ On February 5, 2018, pursuant to Section 
19(b)(2) of the Act,\12\ the Commission designated a longer period 
within which to issue an order approving or disapproving the proposed 
rule change.\13\ On February 22, 2018, the Exchange filed Amendment No. 
3 to the proposed rule change.\14\ The Commission is publishing this 
notice to solicit comments on Amendment No. 3 from interested persons, 
and is approving the proposed rule change, as modified by Amendment 
Nos. 1, 2, and 3, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81311 (August 3, 
2017), 82 FR 37248 (``Notice'').
    \4\ In Amendment No. 1, the Exchange updated the proposal to 
reflect the approval of the proposal by the Exchange's Board of 
Directors on July 21, 2017. Amendment No. 1 is available at https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074.htm. Because 
Amendment No. 1 is a technical amendment that does not alter the 
substance of the proposed rule change, it is not subject to notice 
and comment.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 81668, 82 FR 45095 
(September 27, 2017). The Commission designated November 7, 2017 as 
the date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
    \7\ See Letters to Brent J. Fields, Secretary, Commission, from 
Stephen John Berger, Managing Director, Government & Regulatory 
Policy, Citadel Securities, dated August 30, 2017 (``Citadel 
Letter''); Ray Ross, Chief Technology Officer, The Clearpool Group, 
dated September 12, 2017 (``Clearpool Letter''); and Joanna Mallers, 
Secretary, FIA Principal Traders Group, dated September 19, 2017 
(``FIA PTG Letter'').
    \8\ In Amendment No. 2, the Exchange: (1) Modified the proposal 
to prevent MELOs from executing when there is a non-displayed order 
priced more aggressively than the NBBO midpoint resting on the 
Nasdaq book; (2) provided additional description, clarification, and 
rationale for certain aspects of the proposal; and (3) responded to 
several concerns raised by commenters on the proposal. Amendment No. 
2 is available at https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074.htm.
    \9\ 15 U.S.C. 78s(b)(2)(B).
    \10\ See Securities Exchange Act Release No. 82013, 82 FR 52075 
(November 9, 2017) (``Order Instituting Proceedings'').
    \11\ See Letter to Brent J. Fields, Secretary, Commission, from 
Edward K. Shin, dated December 8, 2017 (``Shin Letter'').
    \12\ 15 U.S.C. 78s(b)(2).
    \13\ See Securities Exchange Act Release No. 82629, 83 FR 5822 
(February 9, 2018). The Commission designated March 7, 2018 as the 
date by which the Commission shall either approve or disapprove the 
proposed rule change.
    \14\ In Amendment No. 3, the Exchange proposed to publish weekly 
aggregated statistics showing the number of shares and transactions 
of MELOs executed on the Exchange by security. This information 
would be published on Nasdaqtrader.com with a two-week delay for 
MELO executions in NMS stocks in Tier 1 of the NMS Plan to Address 
Extraordinary Market Volatility (``LULD Plan'') and a four-week 
delay for MELO executions in all other NMS stocks. The Exchange also 
proposed to publish monthly aggregated block-sized trading 
statistics of total shares and total transactions of MELOs executed 
on the Exchange. This information would be published on 
Nasdaqtrader.com no earlier than one month following the end of the 
month for which trading was aggregated. Amendment No. 3 is available 
at https://www.sec.gov/comments/sr-nasdaq-2017-074/nasdaq2017074.htm.
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II. Description of the Proposal

    The Exchange proposed to offer the MELO order type. A MELO would be 
a non-displayed order priced at the midpoint between the National Best 
Bid and Offer (``NBBO'') and would not be eligible to execute until a 
minimum period of one half of a second (``Holding Period'') has passed 
after acceptance of the order by the system.\15\ Once eligible to 
trade, MELOs would be ranked in time priority at the NBBO midpoint 
among other MELOs.\16\ If a limit price is assigned to a MELO, the 
order would be: (1) Eligible for execution in time priority after 
satisfying the Holding Period if upon acceptance of the order by the 
system, the midpoint price is within the limit set by the participant; 
or (2) held until the midpoint falls within the limit set by the 
participant, at which time the Holding Period would commence and 
thereafter the system would make the order eligible for execution in 
time priority.\17\
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    \15\ See proposed Nasdaq Rule 4702(b)(14)(A).
    \16\ See id.
    \17\ See id.
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    If a MELO is modified by a member (other than to decrease the size 
of the order or to modify the marking of a sell order as long, short, 
or short exempt) during the Holding Period, the system would restart 
the Holding Period.\18\ Similarly, if a MELO is modified by a member 
(other than to decrease the size of the order or to modify the marking 
of a sell order as long, short, or short exempt) after it has become 
eligible to execute, the order would have to satisfy a new Holding 
Period.\19\
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    \18\ See id. The Exchange noted that any change to a MELO that 
would result in a change in the order's timestamp would result in 
the MELO being considered altered, and thus the order would be 
subject to a new Holding Period before being eligible to trade and 
its priority would be based on the new timestamp. See Amendment No. 
2 at n.16.
    \19\ See proposed Nasdaq Rule 4702(b)(14)(A).
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    Movements in the NBBO while a MELO is in the Holding Period would 
not reset the Holding Period, even if, as a result of the NBBO move, 
the MELO's limit price is less aggressive than the NBBO midpoint.\20\ 
Also, if a MELO has met the Holding Period, but the NBBO midpoint is no 
longer within its limit, it would nonetheless be ranked in time 
priority among other MELOs if the NBBO later moves such that the 
midpoint is within the order's limit price (i.e., no new Holding 
Period).\21\
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    \20\ See Amendment No. 2 at n.11.
    \21\ See proposed Nasdaq Rule 4702(b)(14)(A); Amendment No. 2 at 
n.15.
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    MELOs may be entered via any of the Exchange's communications 
protocols and the type of communications protocol used would not affect 
how the system handles MELOs.\22\ If there is no NBB or NBO, the 
Exchange would accept MELOs but would not allow MELO executions until 
there is an NBBO.\23\ MELOs would be eligible to

[[Page 10938]]

trade if the NBBO is locked.\24\ If the NBBO is crossed, MELOs would be 
held by the system until such time that the NBBO is no longer crossed, 
at which time they would be eligible to trade.\25\ MELOs may be 
cancelled at any time, including during the Holding Period.\26\
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    \22\ See Amendment No. 2 at n.10.
    \23\ See id. at 12. If there is no NBB or NBO upon entry of a 
MELO, the system would hold the order in time priority, together 
with any other MELOs received while there is no NBB or NBO. See id. 
Once there is an NBBO, the Holding Period would begin for the held 
MELOs based on time priority. See id.
    \24\ See id. at 12-13.
    \25\ See id. at 13.
    \26\ See proposed Nasdaq Rule 4702(b)(14)(A).
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    MELOs would be active only during Market Hours.\27\ MELOs entered 
during Pre-Market Hours would be held by the system in time priority 
until Market Hours.\28\ MELOs entered during Post-Market Hours would 
not be accepted by the system, and MELOs remaining unexecuted after 
4:00 p.m. ET would be cancelled by the system.\29\ MELOs would not be 
eligible for the Nasdaq opening, halt, and closing crosses.\30\
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    \27\ See proposed Nasdaq Rule 4702(b)(14)(B). Market Hours begin 
after the completion of the Nasdaq Opening Cross (or at 9:30 a.m. ET 
in the case of a security for which no Nasdaq Opening Cross occurs). 
See Nasdaq Rule 4703(a).
    \28\ See proposed Nasdaq Rule 4702(b)(14)(B). ``Pre-Market 
Hours'' means the period of time beginning at 4:00 a.m. ET and 
ending immediately prior to the commencement of Market Hours. See 
Nasdaq Rule 4701(g). A MELO entered during Pre-Market Hours would be 
held by the system until the completion of the Opening Cross (or 
9:30 a.m. ET if no Opening Cross occurs), ranked in the time that it 
was received by the Nasdaq book upon satisfaction of the Holding 
Period. See Amendment No. 2 at 11-12.
    \29\ See proposed Nasdaq Rule 4702(b)(14)(B). ``Post-Market 
Hours'' means the period of time beginning immediately after the end 
of Market Hours and ending at 8:00 p.m. ET. See Nasdaq Rule 4701(g).
    \30\ See proposed Nasdaq Rule 4703(l); Amendment No. 2 at 12. 
MELOs in existence at the time a halt is initiated would be 
ineligible to execute and held by the system until trading has 
resumed and the NBBO has been received by Nasdaq. See proposed 
Nasdaq Rule 4702(b)(14)(A).
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    MELOs must be entered with a size of at least one round lot, and 
any shares of a MELO remaining after an execution that are less than 
one round lot would be cancelled.\31\ MELOs may have a minimum quantity 
order attribute.\32\ MELOs may not be designated with a time-in-force 
of immediate or cancel (``IOC'') and are ineligible for routing.\33\ 
They also may not have the discretion, reserve size, attribution, 
intermarket sweep order, display, or trade now order attributes.\34\
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    \31\ See proposed Nasdaq Rule 4702(b)(14)(B).
    \32\ See id.
    \33\ See id.; Amendment No. 2 at 11 and 13.
    \34\ See Amendment No. 2 at 13-14.
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    Once a MELO becomes eligible to execute by existing unchanged for 
the Holding Period, the MELO may only execute against other eligible 
MELOs.\35\ MELOs would not execute if there is a resting non-displayed 
order priced more aggressively than the NBBO midpoint, and they instead 
would be held until the resting non-displayed order is no longer on the 
Nasdaq book or the NBBO midpoint matches the price of the resting non-
displayed order.\36\ MELO executions would be reported to Securities 
Information Processors and provided in Nasdaq's proprietary data feed 
without any new or special indication.\37\ The Exchange would, however, 
publish delayed weekly aggregated statistics, as well as delayed 
monthly aggregated block-sized trading statistics, for MELO 
executions.\38\ Specifically, the Exchange would publish on 
Nasdaqtrader.com weekly aggregated statistics showing the number of 
shares and transactions of MELOs executed on Nasdaq by security.\39\ 
This information would be published with a two-week delay for NMS 
stocks in Tier 1 of the LULD Plan, and a four-week delay for all other 
NMS stocks.\40\ The Exchange also would publish on Nasdaqtrader.com 
monthly aggregated block-sized trading statistics of total shares and 
total transactions of MELOs executed on Nasdaq.\41\ This information 
would be published no earlier than one month following the end of the 
month for which trading was aggregated.\42\ Under the proposal, a 
transaction would be considered ``block-sized'' if it meets any of the 
following criteria: (1) 10,000 or more shares; (2) $200,000 or more in 
value; (3) 10,000 or more shares and $200,000 or more in value; (4) 
2,000 to 9,999 shares; (5) $100,000 to $199,999 in value; or (6) 2,000 
to 9,999 shares and $100,000 to $199,999 in value.\43\
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    \35\ See proposed Nasdaq Rule 4702(b)(14)(A).
    \36\ See id.; Amendment No. 2 at 9.
    \37\ See Amendment No. 2 at 15.
    \38\ See proposed Nasdaq Rule 4702(b)(14)(A); Amendment No. 3 at 
3-6.
    \39\ See proposed Nasdaq Rule 4702(b)(14)(A).
    \40\ See id.
    \41\ See id.
    \42\ See id.
    \43\ See id.
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    As proposed, MELOs would be subject to real-time surveillance to 
determine if the order type is being abused by market participants.\44\ 
In addition, the Exchange intends to implement a process, at the same 
time as the implementation of MELOs, to monitor the use of MELOs with 
the intent to apply additional measures, as necessary, to ensure their 
usage is appropriately tied to the intent of the order type.\45\ The 
Exchange stated that this process may include metrics tied to 
participant behavior, such as the percentage of MELOs that are 
cancelled prior to the completion of the Holding Period, the average 
duration of MELOs, and the percentage of MELOs where the NBBO midpoint 
is within the limit price when received.\46\ The Exchange stated that 
it is committed to determining whether there is opportunity or 
prevalence of behavior that is inconsistent with normal risk management 
behavior.\47\ According to the Exchange, manipulative abuse is subject 
to potential disciplinary action under the Exchange's rules, and other 
behavior that is not necessarily manipulative but nonetheless 
frustrates the purposes of the MELO order type may be subject to 
penalties or other participant requirements to discourage such 
behavior, should it occur.\48\
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    \44\ See Amendment No. 2 at 22.
    \45\ See id.
    \46\ See id.
    \47\ See id. at 22-23.
    \48\ See id. at 23.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\49\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\50\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, 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, and that the rules are not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers; and Section 6(b)(8) of the Act,\51\ which requires that the 
rules of a national securities exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \49\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78f(b)(5).
    \51\ 15 U.S.C. 78f(b)(8).
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    The Commission has carefully considered the MELO order type and 
finds that it is consistent with the Act. The Commission believes that 
the MELO order type could create

[[Page 10939]]

additional and more efficient trading opportunities on the Exchange for 
investors with longer investment time horizons, including institutional 
investors, and provide these investors with an ability to limit the 
information leakage and the market impact that could result from their 
orders.
    As noted above, the Commission received four comment letters on the 
proposed rule change.\52\ One commenter supported the proposed rule 
change, stating that MELOs could provide a valuable tool for investors 
(particularly institutional investors) seeking to execute in large size 
to effectively implement their investment strategies on an exchange and 
could attract longer-term market participants to Nasdaq.\53\ This 
commenter also stated the benefits to investors of trading MELOs on an 
exchange as compared to off-exchange trading venues.\54\ In particular, 
the commenter noted that trading on an exchange is open to all 
participants, and is a far fairer, more transparent way for markets to 
operate in contrast to off-exchange trading venues.\55\
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    \52\ See supra notes 7 and 11.
    \53\ See Clearpool Letter at 1-3.
    \54\ See id. at 2.
    \55\ See id.
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    Two commenters expressed the concern that MELOs would create a 
separate order book within the Nasdaq matching system where only MELOs 
could interact with each other.\56\ One of these commenters stated that 
the proposal represents an unprecedented level of exchange-based order 
flow segmentation.\57\ This commenter acknowledged the existence of 
limited exchange-based mechanisms that have the effect of restricting 
some order flow interaction, but contended that the proposal goes 
significantly beyond any such existing restrictions.\58\ The other 
commenter also asserted that artificially introducing latency 
negatively impacts the price discovery and formation functions of the 
Exchange.\59\
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    \56\ See Citadel Letter at 1-3; FIA PTG Letter at 2.
    \57\ See Citadel Letter at 1. This commenter noted that the 
proposal would result in two orders on the Exchange failing to 
interact when one order is a MELO and the other order is not. See 
id. at 3.
    \58\ See id.
    \59\ See FIA PTG Letter at 2.
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    In addition, one commenter remarked that market participants with 
marketable held orders or resting orders seeking to execute against 
marketable held order flow would be unlikely to utilize MELOs because 
marketable held orders are typically required to be executed fully and 
promptly.\60\ According to the commenter, as use of the MELO order book 
increases, liquidity in the non-MELO order book could be negatively 
impacted to the detriment of retail investors.\61\ In addition, the 
commenter stated that investors submitting resting MELOs would not be 
able to interact with marketable held order flow.\62\ The commenter 
suggested that the Exchange could partially mitigate the negative 
impacts of MELO order segmentation by revising its proposal to allow 
any order to immediately interact with a resting MELO as long as it is 
priced beyond the midpoint.\63\
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    \60\ See Citadel Letter at 1-2.
    \61\ See id. at 2.
    \62\ See id.
    \63\ See id.
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    In contrast, one commenter stated that allowing MELOs to interact 
with non-MELOs would defeat the purpose of the MELO order type.\64\ 
This commenter also stated that it does not believe that the proposal 
would negatively impact liquidity or price discovery on the Nasdaq 
market because the MELO order type should have little to no detrimental 
effect on participants using other order types.\65\ According to this 
commenter, to the extent that the MELO order type would provide 
incentives for order flow to be directed to a fair access exchange and 
away from private market centers, price discovery for the broader 
markets might improve.\66\
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    \64\ See Clearpool Letter at 3.
    \65\ See id.
    \66\ See id.
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    The Exchange responded to these comments in Amendment No. 2, and 
stated that although MELOs may forgo the opportunity to interact with 
other liquidity on the Exchange, MELO users will have accepted this 
possibility in return for the ability to interact with other market 
participants with the same time horizon.\67\ The Exchange also compared 
MELOs to the minimum quantity order attribute, as well as the retail 
price improving orders available on Nasdaq BX, Inc.\68\ The Exchange 
stated that both of these types of orders provide the opportunity to 
interact with orders meeting certain characteristics, and consequently 
may miss the opportunity to receive an execution if the contra-side 
order does not meet the specified characteristics.\69\ The Exchange 
also stated that it is not unfair or discriminatory that non-displayed 
orders resting on Nasdaq that are priced more aggressively than the 
NBBO midpoint would not participate in MELO executions.\70\ According 
to the Exchange, the use of resting non-displayed orders and MELOs 
would be available to all Exchange participants, who need to evaluate 
which order type best serves their investment needs.\71\ The Exchange 
also noted that it conducted a pro forma study of the effect of 
applying MELOs to the current market by reviewing all executions 
occurring on Nasdaq in August 2017, and found that only 0.37% of 
resting non-displayed orders traded at a price better than the 
prevailing midpoint at the time of execution.\72\ According to the 
Exchange, consequently, the number of situations in which a participant 
would have to consider the trade-offs between posting a non-displayed 
buy (sell) order at a higher (lower) price as compared to submitting a 
MELO is minimal.\73\ In addition, the Exchange reiterated that all 
members may use MELOs and thus have access to MELO liquidity.\74\ 
Finally, the Exchange amended the proposal to provide that MELOs would 
not execute if there is a resting non-displayed order priced more 
aggressively than the NBBO midpoint; rather, MELOs would be held until 
the resting non-displayed order is no longer on the Nasdaq book or the 
NBBO midpoint matches the price of the resting non-displayed order.\75\
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    \67\ See Amendment No. 2 at 19.
    \68\ See id.
    \69\ See id.
    \70\ See id. at 20.
    \71\ See id.
    \72\ See id. at 21.
    \73\ See id.
    \74\ See id.
    \75\ See id. at 9; proposed Nasdaq Rule 4702(b)(14)(A).
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    The Commission believes that the proposed MELO order type is 
reasonably designed to enhance midpoint execution quality on the 
Exchange. The Commission notes that the concept of exchange order types 
or attributes that permit market participants to elect not to execute 
against certain contra-side interest is not novel. Existing order 
functionalities, such as the minimum quantity and post-only conditions, 
enable market participants to direct their orders to execute only if 
certain conditions are met by contra-side order flow. The Commission 
also notes that the Holding Period introduced by the Exchange's 
proposal is specific to MELOs and thus does not introduce latency with 
respect to any other type of trading interest on the Exchange. 
Moreover, as noted above, the MELO order type (including its Holding 
Period) could create additional and more efficient trading 
opportunities on the Exchange for investors with longer investment time 
horizons. In addition, the Commission notes that, unlike a scenario in 
which orders are directed among multiple separate trading venues where 
price priority might not be available among the orders,

[[Page 10940]]

the Exchange's proposal would ensure that a MELO does not execute at a 
price that is inferior to the price of a resting non-displayed order 
(i.e., a resting order priced more aggressively than the NBBO 
midpoint). Finally, the Commission notes that all Nasdaq members may 
utilize MELOs if they so choose. Accordingly, the Commission believes 
that the Exchange's proposal represents a reasonable effort to enhance 
the ability of longer-term trading interest to participate effectively 
on an exchange, without discriminating unfairly against other market 
participants or inappropriately or unnecessarily burdening competition.
    One commenter raised the concern that, under the proposal, MELO 
executions would be reported to the Securities Information Processors 
and provided on Nasdaq's proprietary data feed in the same manner as 
all other transactions on Nasdaq.\76\ This commenter stated that this 
approach likely would raise concerns about market fairness and 
introduce significant complexity for investors, broker-dealers, and 
regulators when attempting to analyze market activity and assess 
execution quality.\77\ This commenter noted, by way of example, that 
investors may see their orders executed on Nasdaq at worse prices than 
other contemporaneous executions on Nasdaq and that, without Nasdaq 
labeling MELO executions as such, investors may not know why this has 
occurred.\78\ This commenter also asserted that, without labeling MELO 
executions differently than other executions on Nasdaq, broker-dealer 
routing logic may be influenced by liquidity that is not actually 
accessible, and regulators may experience difficulties in accurately 
filtering market data when evaluating compliance with regulatory 
requirements such as best execution.\79\ This commenter urged the 
Commission to require that executions resulting from MELOs be marked as 
such on the tape.\80\
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    \76\ See Citadel Letter at 3.
    \77\ See id.
    \78\ See id.
    \79\ See id.
    \80\ See id. Alternatively, the commenter suggested that Nasdaq 
offer the MELO order type on a separate exchange. See id.
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    By contrast, one commenter stated that it does not believe that the 
lack of specific identification of MELOs in trade reports would result 
in any difficulties for the markets, or complexity for investors or 
other market participants when assessing execution quality.\81\ 
According to this commenter, MELO users would be provided with 
anonymity and confidentiality, which the commenter asserted are 
critical tools in preventing potentially predatory counterparties from 
determining intention and using that information to generate short-term 
profits at the expense of longer-term investors.\82\ In addition, this 
commenter stated that exchanges currently offer many order types that 
when executed do not indicate exactly which order types were used.\83\
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    \81\ See Clearpool Letter at 2.
    \82\ See id.
    \83\ See id.
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    The Exchange responded to these comments in Amendment No. 2, and 
noted that transactions in MELOs would be reported to the Securities 
Information Processors and provided in Nasdaq's proprietary data feed 
in the same manner as all other transactions occurring on Nasdaq are 
done currently (i.e., without any new or special indication that a 
transaction is a MELO execution).\84\ According to the Exchange, not 
identifying MELO executions in real-time is important to ensuring that 
investors are protected from market participants that would otherwise 
take advantage of the knowledge of MELO executions and undermine the 
usefulness of the order type.\85\ In particular, according to the 
Exchange, MELO is designed to increase access to, and participation on, 
Nasdaq for investors that are less concerned with the time to 
execution, but rather are looking to source liquidity, often in greater 
size, at the NBBO midpoint against a counterparty order that has the 
same objectives.\86\ The Exchange noted that the proposal is designed 
to help ensure that members with MELOs are not disadvantaged by other 
order types entered by participants that have the benefit of knowing, 
and reacting to, rapid changes in the market.\87\ Moreover, in 
Amendment No. 3, the Exchange proposed to publish delayed execution 
volume statistics for MELOs. As discussed above, the Exchange proposed 
to publish weekly aggregated volume statistics regarding the number of 
shares and transactions of MELOs executed on the Exchange by security, 
as well as monthly aggregated block-sized trading statistics of total 
shares and total transactions of MELOs executed on the Exchange.\88\ 
The weekly aggregated information would be published on 
Nasdaqtrader.com with a two-week delay for NMS stocks in Tier 1 of the 
LULD Plan and a four-week delay for all other NMS stocks.\89\ The 
monthly aggregated information would be published on Nasdaqtrader.com 
no earlier than one month following the end of the month for which 
trading was aggregated.\90\
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    \84\ See Amendment No. 2 at 25.
    \85\ See id.
    \86\ See id. at 17.
    \87\ See id. at 9.
    \88\ See proposed Nasdaq Rule 4702(b)(14)(A).
    \89\ See id.
    \90\ See id.
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    The Commission notes that the proposed MELO order type is intended 
to provide additional execution opportunities on the Exchange for 
market participants that may not be as sensitive to very short-term 
changes in the NBBO and are willing to wait a prescribed period of time 
following their order submission to receive a potential execution 
against other market participants that have similarly elected to forgo 
an immediate execution. In particular, the proposed MELO order type is 
intended to mitigate the risk that an opportunistic low-latency trader 
will be able to execute against a member's order at a time that is 
disadvantageous to the member, such as just prior to a change in the 
NBBO. The Commission also believes that the proposal to publish delayed 
aggregated statistics for MELO executions is reasonably designed to 
provide transparency regarding MELO executions on the Exchange without 
undermining the usefulness of the order type by limiting the potential 
information leakage and the resulting market impact that could be 
associated with non-delayed identification of individual MELO 
executions.
    One commenter asserted that allowing MELOs to be cancelled at any 
time during the Holding Period does not appear to be consistent with 
the intended use of the order type.\91\ Instead, according to this 
commenter, a MELO should only be permitted to be cancelled after the 
Holding Period has expired and the order has been placed in the order 
book.\92\ Another commenter expressed concern that high-frequency 
traders and algorithms could take advantage of MELOs.\93\ By contrast, 
one commenter did not have an issue with providing market participants 
the ability to cancel MELOs during the Holding Period.\94\ This 
commenter stated that it believes this would be an important feature of 
the MELO order type because many firms use algorithms to source 
liquidity simultaneously from multiple venues.\95\ According to the 
commenter, to the extent that liquidity is found elsewhere than Nasdaq 
within the

[[Page 10941]]

Holding Period, it would be critically important that the firm be able 
to cancel its orders from Nasdaq and re-allocate those shares to other 
venues.\96\ This commenter stated that it does not believe any market 
participants would be harmed in such a circumstance.\97\
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    \91\ See Citadel Letter at 4.
    \92\ See id.
    \93\ See Shin Letter.
    \94\ See Clearpool Letter at 3.
    \95\ See id.
    \96\ See id.
    \97\ See id.
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    In Amendment No. 2, the Exchange responded that MELOs may be 
cancelled at any time, including during the Holding Period, to allow 
members to effectively manage risk.\98\ The Exchange also acknowledged 
that the potential exists for some participants to use MELOs in a way 
that conflicts with the stated intention of the order type to allow 
longer term investors the opportunity to safely find like-minded 
counterparties at the midpoint on Nasdaq.\99\ For this reason, the 
Exchange represented that MELOs would be subject to real-time 
surveillance to determine if the order type is being abused by market 
participants.\100\ The Exchange also stated that it plans to implement 
a process, at the same time as the implementation of MELOs, to monitor 
the use of MELOs, with the intent to apply additional measures, as 
necessary, to ensure that their usage is appropriately tied to the 
intent of the order type.\101\ According to the Exchange, this process 
may include metrics tied to participant behavior, such as the 
percentage of MELOs cancelled prior to completion of the Holding 
Period, the average duration of MELOs, and the percentage of MELOs 
where the NBBO midpoint is within the limit price when received.\102\ 
The Exchange stated that manipulative abuse is subject to potential 
disciplinary action under the Exchange's rules, and other behavior that 
frustrates the purposes of the MELO order type may be subject to 
penalties or other requirements to discourage such behavior, should it 
occur.\103\
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    \98\ See Amendment No. 2 at 8.
    \99\ See id. at 22.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ See id. at 23.
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    The Commission believes that the Exchange's proposed measures are 
reasonably designed to deter potential improper use of the proposed 
MELO order type. In particular, the Commission notes that the Exchange 
has represented that it will conduct real-time surveillance to monitor 
the use of MELOs and ensure that such usage is appropriately tied to 
the intent of the order type.\104\ Moreover, importantly, the Exchange 
will measure the metrics noted above that reflect participant behavior 
with respect to MELOs, such as the percentage of a participant's MELOs 
that are cancelled prior to the completion of the Holding Period.\105\ 
As the Exchange represented in its filing, the Commission expects the 
Exchange to continue to evaluate whether additional measures may be 
necessary to ensure that MELOs are used in a manner consistent with the 
intended purpose of the order type.\106\
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    \104\ See id. at 22-23.
    \105\ See id. at 22.
    \106\ See id.
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IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 3 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-2017-074 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-2017-074. 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-2017-074, and should be submitted 
on or before April 3, 2018.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1, 2, and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3, prior to the 
thirtieth day after the date of publication of notice of the filing of 
Amendment No. 3 in the Federal Register. As discussed above, in 
Amendment No. 3, the Exchange proposed to provide on Nasdaqtrader.com 
certain delayed aggregated volume statistics for MELOs executed on the 
Exchange. The Commission notes that Amendment No. 3 is designed to 
provide transparency regarding MELO executions on the Exchange. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\107\ to approve the proposed rule change, as 
modified by Amendment Nos. 1, 2, and 3, on an accelerated basis.
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    \107\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\108\ that the proposed rule change (SR-NASDAQ-2017-074), as 
modified by Amendment Nos. 1, 2, and 3 be, and hereby is, approved on 
an accelerated basis.
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    \108\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\109\
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    \109\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-04979 Filed 3-12-18; 8:45 am]
 BILLING CODE 8011-01-P