Document ID: SEC-2022-0132-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2022-01-28T05:00Z

[Federal Register Volume 87, Number 19 (Friday, January 28, 2022)]
[Notices]
[Pages 4683-4686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01709]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94038; File No. SR-NASDAQ-2021-040]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, To 
Establish the ``Extended Trading Close'' and Related Order Types

January 24, 2022.

I. Introduction

    On July 12, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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 add Equity 4, Rule (``Rule'') 4755 and amend 
Rules 4702 and 4703 to establish the ``Extended Trading Close,'' as 
well as the ``ETC Eligible LOC'' and ``Extended Trading Close'' order 
types. The proposed rule change was published for comment in the 
Federal Register on July 28, 2021.\3\ On September 9, 2021, pursuant to 
Section 19(b)(2) of the Act,\4\ 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 
disapprove the proposed rule change.\5\ On October 25, 2021, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
amended and superseded the proposed rule change as originally filed.\6\ 
On October 26, 2021, the Commission published notice of Amendment No. 1 
and instituted proceedings pursuant to Section 19(b)(2)(B) of the Act 
\7\ to determine whether to approve or disapprove the proposed rule 
change, as modified by Amendment No. 1.\8\ This order approves the 
proposed rule change, as modified by Amendment No. 1.
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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. 92466 (July 22, 
2021), 86 FR 40667. The comment letters received on the proposed 
rule change are available on the Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2021-040/srnasdaq2021040.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92905, 86 FR 51390 
(September 15, 2021).
    \6\ In Amendment No. 1, the Exchange modified the scenarios in 
which executions in the Extended Trading Close would be suspended, 
and made conforming and clarifying changes throughout the proposed 
rule change. Amendment No. 1 is available on the Commission's 
website at: https://www.sec.gov/comments/sr-nasdaq-2021-040/srnasdaq2021040.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 93428, 86 FR 60318 
(November 1, 2021).
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II. Description of the Proposal

    The Exchange proposes to adopt the Extended Trading Close 
(``ETC''), which would be a process during which eligible orders in 
Nasdaq-listed securities may match and execute at the Nasdaq official 
closing price (``NOCP''), as determined by the Nasdaq closing cross or 
the LULD closing cross (together, the ``Closing Cross''), for a five-
minute period immediately following the Closing Cross.\9\
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    \9\ See proposed Rule 4755(a)(5).
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    As proposed, only ``ETC Orders'' and ``ETC Eligible LOC Orders'' 
(together, ``ETC Eligible Orders'') would be eligible to participate in 
the ETC.\10\ An ETC Order would be a new order type for Nasdaq-listed 
securities that may be executed only during the ETC and only at the 
NOCP as determined by the Closing Cross.\11\ An ETC Order may be 
entered, cancelled, or modified between the time when the ETC commences 
and ends.\12\ If an ETC Order is not fully executed at the conclusion 
of the ETC, then any unexecuted portion of the order would be 
cancelled.\13\ An ETC Eligible LOC Order would be a LOC order for a 
Nasdaq-listed security entered through RASH or FIX that did not fully 
execute during the Closing Cross, and would participate in the ETC if 
the NOCP, as determined by the Closing Cross, is at or within its limit 
price.\14\ A participant may choose to disable a LOC order from 
participating in the ETC, in which case the system would cancel any 
shares of the LOC order that remain unexecuted after the Closing 
Cross.\15\ In addition, if a participant enters a time-in-force that 
continues after the time of the Closing Cross for a LOC order (i.e., 
closing cross/extended hours order), then such order would bypass the 
ETC.\16\ Any unexecuted portion of an ETC Eligible LOC Order may be 
cancelled or modified by the participant at any time during the ETC, 
and any unexecuted portion of an ETC Eligible LOC Order at the 
conclusion of the ETC would be cancelled.\17\
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    \10\ ETC Orders and ETC Eligible LOC Orders may only execute 
against other ETC Orders and ETC Eligible LOC Orders. See proposed 
Rules 4702(b)(17)(A) and 4702(b)(12)(A).
    \11\ See proposed Rule 4702(b)(17)(A). An ETC Order may be 
assigned a minimum quantity order attribute, and the minimum 
quantity condition may be satisfied only by execution against one or 
more orders, each of which must have a size that satisfies the 
minimum quantity condition. See proposed Rule 4702(b)(17)(B). See 
also Amendment No. 1 at 13-14 n.18. If no orders in the ETC satisfy 
a minimum quantity condition for an ETC Order, then the ETC Order 
with a minimum quantity condition would rest on the Nasdaq book in 
time priority unless and until there is an order that can satisfy 
the minimum quantity condition to allow for execution of the ETC 
Order; if no such order is present in the ETC at its conclusion, 
then the ETC Order would cancel. See proposed Rule 4702(b)(17)(B). 
Moreover, an ETC Order may be referred to as having a time-in-force 
of ``ETC.'' See proposed Rule 4703(a)(8).
    \12\ The system would reject an ETC Order that is submitted 
prior to the commencement of the ETC. See proposed Rule 
4702(b)(17)(A). In addition, the system would not accept an ETC 
Order entered on any day when insufficient interest exists in the 
system to conduct a Closing Cross for that security, or when the 
Exchange invokes contingency procedures due to a disruption that 
prevents the execution of the Closing Cross. See id.
    \13\ See id.
    \14\ See proposed Rule 4702(b)(12)(A). The Exchange also 
proposes to amend Rule 4702(b)(12) to describe the participation of 
LOC orders in the LULD closing cross.
    \15\ See id. Post-only orders, midpoint peg post-only orders, 
supplemental orders, and market maker peg orders may not operate as 
ETC Eligible LOC Orders, and ETC Eligible LOC Orders would be 
rejected if they are assigned a pegging attribute. See Amendment No. 
1 at 9 n.14.
    \16\ See proposed Rule 4702(b)(12)(B).
    \17\ See proposed Rule 4702(b)(12)(A).
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    As proposed, the ETC would commence upon the conclusion of the 
Closing Cross and end at 4:05 p.m. (or 1:05 p.m. on a day when the 
Exchange closes early).\18\ The system would match

[[Page 4684]]

and execute ETC Eligible Orders continuously throughout the ETC, in 
time priority order based on the time the system received each order 
into the ETC,\19\ and at the NOCP as determined by the Closing 
Cross.\20\ If fewer than all shares of ETC Eligible Orders are executed 
by the conclusion of the ETC, then the system would cancel any 
unexecuted portions of such orders.\21\
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    \18\ As proposed, the ETC would not occur for a security on any 
day when insufficient interest exists in the Exchange system to 
conduct the Closing Cross for that security or when the Exchange 
invokes contingency procedures due to a disruption that prevents the 
execution of the Closing Cross. See proposed Rule 4755(b). Moreover, 
the Exchange would cancel executions in a security that occur in the 
ETC if the Exchange nullifies the Closing Cross in that security 
pursuant to the rules governing clearly erroneous transactions. See 
id. The Exchange also states that if short sale orders in securities 
subject to Regulation SHO are permitted to execute in the Closing 
Cross pursuant to Rule 201 of Regulation SHO, then the system would 
also permit short sale executions in such securities to occur in the 
ETC; whereas the system would reject short sale orders in securities 
if short sale orders in such securities were not permitted to 
execute in the Closing Cross. See Amendment No. 1 at 8 n.11. 
Moreover, the restrictions of Rule 201 of Regulation SHO will apply 
to the ETC to the extent that the current national best bid is being 
calculated, collected, and disseminated for securities. See id.
    \19\ ETC Eligible LOC Orders would receive new timestamps upon 
entry into the ETC and be prioritized amongst each other and ETC 
Orders based on the time the system received each order into the 
ETC. See Amendment No. 1 at 9. Specifically, the system would submit 
ETC Eligible LOC Orders for participation in the ETC, and would 
assign them new timestamps, in random order. See id. at 9 n.15. 
Therefore, ETC Eligible LOC Orders may not necessarily enter the ETC 
with the same relative priority that they had prior to the ETC. See 
id. Moreover, due to the time required for the system to process ETC 
Eligible LOC Orders for participation in the ETC, it is possible 
that an ETC Eligible LOC Order would enter the ETC with a lower time 
priority than an ETC Order entered after the Closing Cross 
concludes. See id.
    \20\ See proposed Rule 4755(b)(2). All ETC Eligible Orders 
executed in the ETC would be trade reported anonymously and 
disseminated via the consolidated tape. See proposed Rule 
4755(b)(5).
    \21\ See proposed Rule 4755(b)(4).
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    Also as proposed, beginning at 4:00:05 p.m. (or 1:00:05 p.m. on a 
day when the Exchange closes early), the Exchange would disseminate by 
electronic means an ETC order imbalance indicator every 5 seconds until 
the ETC concludes.\22\ The ETC order imbalance indicator would 
disseminate the following information: (a) Symbol; (b) the number of 
shares of ETC Eligible Orders that have been matched and executed at 
the NOCP during the ETC, as of the time of dissemination of the ETC 
order imbalance indicator; (c) the size of any ETC imbalance \23\ 
(exclusive of orders with minimum quantity instructions); and (d) the 
buy or sell direction of any ETC imbalance.\24\
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    \22\ See proposed Rule 4755(b)(1).
    \23\ ETC imbalance would mean the number of shares of buy or 
sell ETC Eligible Orders that have not been matched during the ETC. 
See proposed Rule 4755(a)(4).
    \24\ See proposed Rule 4755(a)(8).
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    Moreover, as proposed, the Exchange system would suspend execution 
of ETC Eligible Orders in a security whenever it detects: (i) An order 
in that same security resting on the Nasdaq continuous book in after-
hours trading \25\ with a bid (offer) price that is higher than (lower 
than) the NOCP for that security, as determined by the Closing Cross; 
or (ii) the after-hours trading last sale price, or the best after-
hours trading bid (offer) price, of the security other than on the 
Nasdaq continuous book is either more than 0.5% or $0.01 higher than 
(lower than) the NOCP for that security as determined by the Closing 
Cross, whichever is greater.\26\ The system would resume execution of 
ETC Eligible Orders in a security in scenario (i) if and when the 
system determines, during the ETC, that the Nasdaq continuous book in 
after-hours trading is clear of resting orders in that security with a 
bid (offer) price that is higher than (lower than) the NOCP for that 
security, as determined by the Closing Cross.\27\ The system would 
resume execution of ETC Eligible Orders in a security in scenario (ii) 
if and when the after-hours trading last sale price or the best after-
hours trading bid (offer) price of the security (other than on the 
Nasdaq continuous book) returns to within the greater of the 0.5% or 
$0.01 thresholds during the ETC.\28\ If execution of ETC Eligible 
Orders remains suspended as of the conclusion of the ETC, then the 
system would cancel any remaining unexecuted ETC Eligible Orders in 
that security.\29\
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    \25\ See proposed Rule 4755(a)(1) (defining ``after hours 
trading'').
    \26\ See proposed Rule 4755(b)(3).
    \27\ See id.
    \28\ See id.
    \29\ See id.
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    The Exchange represents that it will surveil the ETC for any unfair 
or manipulative trading practices.\30\
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    \30\ See Amendment No. 1 at 19.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\31\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\32\ 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,\33\ 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. The Commission 
believes that the ETC would provide an additional opportunity for 
Exchange participants to trade Nasdaq-listed securities at the NOCP on 
the Exchange, and would provide an alternative to the mechanisms 
currently available on other venues that allow customers to execute 
orders at the Closing Cross price after the Closing Cross concludes.
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    \31\ 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).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ 15 U.S.C. 78f(b)(8).
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    The Commission received a comment letter opposing the proposal.\34\ 
This commenter states that the Exchange has not effectively identified 
the purpose, use case, or client demand for the ETC.\35\ This commenter 
also does not believe that the ETC would enhance the Closing Cross 
process, or improve price discovery or liquidity in the Closing 
Cross.\36\ Rather, this commenter believes that the ETC could detract 
from the Closing Cross because some market participants would withhold 
their interest from the Closing Cross and

[[Page 4685]]

refrain from submitting orders until they know the NOCP.\37\ This, 
according to the commenter, would detract from the robustness and 
quality of the closing price.\38\ Moreover, this commenter states that 
the availability of information going into the closing auction becomes 
the principal driver of price discovery in the continuous market in the 
last five to ten minutes of trading.\39\ According to the commenter, if 
participants do not submit their true interest in hopes they could 
trade in greater size utilizing the ETC, the breadth and quality of 
market information could be affected and result in more uncertainty and 
volatility in continuous trading behavior leading into the close.\40\
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    \34\ See letter from Mehmet Kinak, Global Head of Systematic 
Trading & Market Structure and Jonathan Siegel, Senior Legal 
Counsel--Legislative & Regulatory Affairs, T. Rowe Price, to Vanessa 
Countryman, Secretary, Commission, dated August 18, 2021 (``T. Rowe 
Letter'').
    \35\ See id. at 1.
    \36\ See id. This commenter also distinguishes the ETC from off-
exchange trading venues' mechanisms that allow their participants to 
receive the NOCP, and states that these other mechanisms are pre-
arranged matched trades or guaranteed close trades that (unlike the 
ETC) are received prior to the Closing Cross and the determination 
of the closing price. See id. at 2. This commenter also states that 
when a trade is sent to an off-exchange mechanism after the Closing 
Cross, it is generally a trade that is executed by a broker in a 
principal capacity, and these transactions tend to be ``clean-up'' 
trades for orders that did not complete in the auction or trades to 
facilitate other specific needs of a client. See id. The commenter 
believes that these existing clean-up and facilitation mechanisms 
generally work well and does not believe there is a void that the 
Exchange needs to fill in this regard. See id.
    \37\ See id. at 1-2.
    \38\ See id. at 2. This commenter also expresses the concern 
that Commission approval of the ETC might encourage others to offer 
similar functions that would likely further detract from 
participation and price discovery in the closing auction. See id.
    \39\ See id. at 3.
    \40\ See id.
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    In its response letter, the Exchange disagrees with the commenter's 
concerns that the ETC would threaten the integrity of the Closing 
Cross.\41\ The Exchange reiterates that the ETC would compete with 
other venues that already offer mechanisms that enable their customers 
to execute orders at the Closing Cross price after the Closing Cross 
concludes.\42\ The Exchange also does not believe that the ETC would 
siphon orders away from the Closing Cross.\43\ According to the 
Exchange, the Closing Cross is robust, efficient, and affords its 
participants reasonable assurance that their orders will execute, and 
the published indicative price and order imbalance information prior to 
the commencement of the Closing Cross enable its participants to 
mitigate their risks of participating in the Closing Cross.\44\ The 
Exchange believes that the ETC should not significantly alter the 
behavior of participants for which execution assurance is 
important,\45\ and that the ETC could bolster participants' willingness 
to participate in the Closing Cross because the ETC would provide an 
added opportunity for their LOC orders to execute at the Closing Cross 
price.\46\ The Exchange further states that it expects participants to 
use the ETC as a ``clean-up'' mechanism for executing orders that are 
not executed in the Closing Cross or to facilitate other specific 
client needs.\47\
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    \41\ See letter from Brett M. Kitt, Associate Vice President & 
Principal Associate General Counsel, Nasdaq, to Vanessa Countryman, 
Secretary, Commission, dated September 9, 2021 (``Nasdaq Response 
Letter'').
    \42\ See id. at 1-2.
    \43\ See id. at 2. The Exchange states that, to the extent that 
it assesses that the ETC has become too large relative to the 
Closing Cross, or that members are indeed utilizing the ETC as a 
regular substitute for the Closing Cross, then it will propose such 
actions as are necessary to mitigate any threat to the Closing Cross 
or its price discovery function. See id. at 3.
    \44\ See id. at 2.
    \45\ The Exchange also states that, for those participants that 
seek to execute large volumes of shares at the Closing Cross price, 
exclusive participation in the ETC is unlikely to meet their needs, 
as ETC-only orders will execute only to the extent that sufficient 
matching share volume exists in the ETC. See id. According to the 
Exchange, because it would disseminate ETC imbalance information 
only after the ETC commences, participants in the ETC would have 
less assurance about the outcome of their participation than when 
they participate in the Closing Cross, or in the Closing Cross and 
ETC together. See id.
    \46\ See id.
    \47\ See id. The Exchange also states that market forces should 
determine whether the market for this service is already saturated 
and whether there is new room for competition. See id.
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    The Commission believes that the ETC would provide Exchange 
participants an opportunity to trade Nasdaq-listed securities at the 
NOCP on the Exchange after the Closing Cross. Specifically, Exchange 
participants that submitted LOC orders for the Closing Cross but did 
not receive a full execution for those orders could choose to allow the 
remaining shares to participate in the ETC. In addition, Exchange 
participants that did not participate in the Closing Cross but want to 
trade at the NOCP could submit ETC Orders to participate in the ETC. 
The Commission further believes that the ETC would provide an 
alternative to the mechanisms currently available on other venues that 
allow customers to execute orders at the Closing Cross price after the 
Closing Cross concludes.
    With respect to the commenter's concern that the ETC would cause 
Exchange participants to withhold their interest from the Closing Cross 
and negatively impact the Closing Cross process, the Commission 
believes that participants that currently seek to trade at the NOCP in 
the Closing Cross (and particularly those that seek to trade larger 
orders) are unlikely to significantly reduce their participation in the 
Closing Cross and rely instead on the ETC, because there is less 
assurance that their orders would receive executions in the ETC as 
compared to the Closing Cross. In particular, ETC Eligible Orders would 
trade only to the extent that there are available contra-side ETC 
Eligible Orders, and while the Exchange would disseminate imbalance 
information for the ETC, unlike the Closing Cross, such imbalance 
information would not be disseminated before the commencement of the 
ETC. The Commission also notes that, in response to this concern 
expressed by the commenter, the Exchange represented that, if it 
assesses that the ETC has become too large relative to the Closing 
Cross, or that participants are indeed utilizing the ETC as a regular 
substitute for the Closing Cross, then it will propose such actions as 
are necessary to mitigate any threat to the Closing Cross or its price 
discovery function.\48\
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    \48\ See supra note 43.
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    The commenter also expresses concern that the ETC would allow 
sophisticated participants to engage in arbitrage by quickly 
identifying price differences between the Closing Cross price and the 
prevailing after-hours market price before other participants.\49\ 
According to the commenter, these sophisticated participants could use 
ETC-only order types and ETC imbalance information to opportunistically 
submit orders to engage with other participants' ETC activity at a 
previously determined fixed price using the ETC and unwind risk in the 
after-market at prices that more accurately reflect the current value 
of the security.\50\
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    \49\ See T. Rowe Letter at 3.
    \50\ See id.
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    In its response letter, the Exchange states that it does not share 
the commenter's concerns regarding arbitrage, and states that any risk 
that ETC participants would face harm from arbitrageurs is likely to be 
considerably less than the risks that market participants presently 
face when they trade after-hours.\51\ The Exchange also states that 
because it would suspend ETC executions if significant deviations 
emerge between the Closing Cross price and the after-hours market price 
of a security, this should limit the instances in which egregious 
arbitrage occurs.\52\ Finally, the Exchange reiterates that 
participation in the ETC is voluntary, and therefore any participant 
that is concerned about arbitrageurs is free to not participate in the 
ETC or cancel its orders in the ETC.\53\
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    \51\ See Nasdaq Response Letter at 3.
    \52\ See id.
    \53\ See id.
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    In Amendment No. 1, the Exchange amended the proposal such that the 
Exchange would suspend execution of ETC Eligible Orders in a security 
whenever it detects an order in that security resting on the Nasdaq 
continuous book in after-hours trading with a bid (offer) price that is 
higher than (lower than) the NOCP for that security. The Exchange would 
resume executions of ETC Eligible Orders in that security if and when 
the system determines, during the ETC, that the Nasdaq continuous book 
in after-hours

[[Page 4686]]

trading is clear of resting orders in that security with a bid (offer) 
price that is higher than (lower than) the NOCP. The Commission 
believes that this amendment responds to the commenter's concerns 
regarding the ability of some participants to take advantage of the 
differences between the NOCP and the Exchange's after-hours market 
price.\54\ The Commission also believes that suspending execution of 
ETC Eligible Orders in a security when an order in the same security 
that is priced better than the NOCP is resting on the Nasdaq continuous 
book would help promote price priority on the Exchange.
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    \54\ The Commission notes that no additional comment letters 
were received after the Exchange filed Amendment No. 1.
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    As described above, the Exchange would also suspend execution of 
ETC Eligible Orders in a security whenever the after-hours trading last 
sale price, or the best after-hours trading bid (offer) price, of the 
security (other than on the Nasdaq continuous book) is more than 0.5% 
or $0.01 higher than (lower than) the NOCP for that security, whichever 
is greater. The Exchange would resume executions of ETC Eligible Orders 
in this scenario if and when the after-hours trading last sale price or 
the best after-hours trading bid (offer) price of the security (other 
than on the Nasdaq continuous book) returns to within the greater of 
the 0.5% or $0.01 thresholds during the ETC. The Commission believes 
that these price thresholds should help to ensure additional price 
protection for the ETC as compared to regular after-hours trading, 
because regular after-hours trading is not suspended in response to 
price deviations between the Exchange and away markets.
    Finally, the Commission notes that participation in the ETC is 
voluntary, and those participants that are concerned about arbitrageurs 
may cancel their unexecuted ETC Eligible Orders or elect to not 
participate in the ETC. As described above, the Exchange has also 
represented that it will surveil the ETC for any unfair or manipulative 
trading practices.\55\
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    \55\ See supra note 30 and accompanying text.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\56\ that the proposed rule change (SR-NASDAQ-2021-040), as 
modified by Amendment No. 1 be, and hereby is, approved.
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01709 Filed 1-27-22; 8:45 am]
BILLING CODE 8011-01-P