Document ID: SEC-2020-1165-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2020-07-22T04:00Z

[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Notices]
[Pages 44333-44337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15792]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89334; File No. SR-NASDAQ-2020-037]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a New ``Early Market 
On Close'' Order Type

July 16, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\

[[Page 44334]]

notice is hereby given that on July 6, 2020, The Nasdaq Stock Market 
LLC (``Nasdaq'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 adopt the ``Early Market On Close'' as a 
new order type. The Exchange also proposes to amend Rule 4754 and make 
conforming changes to Rules 4703 and 4756.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Rule 4702 to adopt a new Order Type, 
entitled the ``Early Market on Close'' or ``EMOC'' Order Type. 
Generally speaking, the Exchange intends for the EMOC to be an 
additional offering to its Market On Close (``MOC'') Orders, as well as 
a competitive alternative to the newly-approved Cboe BZX Market-On-
Close order type (the ``Cboe Market Close'' or ``CMC'').\3\ That is, 
EMOC would enable market participants that wish to buy or sell Nasdaq-
listed securities as part of the Nasdaq closing auction (the ``Nasdaq 
Closing Cross''), and to obtain matched executions at the Nasdaq 
Closing Cross price, the ability to do so at a time that is earlier 
than what is possible with ordinary MOC Orders.\4\
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    \3\ See Securities Exchange Act Release No. 34-88008 (January 
21, 2020), 85 FR 4726 (January 27, 2020) (SR-BatsBZX-2017-34) (the 
``BZX Approval Order'').
    \4\ Pursuant to Rule 4702(b)(11), a MOC is an Order Type entered 
without a price that may be executed only during the Nasdaq Closing 
Cross. MOC Orders may be entered between 4 a.m. ET and immediately 
prior to 3:55 p.m. ET. MOC Orders may be cancelled and/or modified 
between 4 a.m. ET and immediately prior to 3:50 p.m. ET. Between 
3:50 p.m. ET and immediately prior to 3:58 p.m. ET, an MOC Order can 
be cancelled and/or modified only if the Participant requests that 
Nasdaq correct a legitimate error in the Order (e.g., Side, Size, 
Symbol, or Price, or duplication of an Order). MOC Orders cannot be 
cancelled or modified at or after 3:58 p.m. ET for any reason. An 
MOC Order shall execute only at the price determined by the Nasdaq 
Closing Cross.
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    Specifically, an EMOC Order would be an unpriced Order to buy or 
sell a Nasdaq-listed security that the Exchange would seek to match 
with other like orders at 3:35 p.m. Eastern Time (``ET''). If so 
matched, the Exchange would execute the Order as part of the Nasdaq 
Closing Cross.
    If no such match occurs, the Exchange would automatically convert 
any unmatched shares of EMOC Orders into a regular MOC Order for 
participation in the Nasdaq Closing Cross, while retaining their 
original time priority. Once converted, unmatched shares of EMOC Orders 
would thereafter be handled in the same manner as an ordinary MOC 
Order. Notably, a participant would be able to cancel or modify a 
converted EMOC Order for any reason after 3:35 and before 3:50 p.m. ET, 
just as it would for a MOC Order, and the participant could cancel or 
modify the converted EMOC Order between 3:50 and prior to 3:58 p.m. ET 
to correct a legitimate error in the Order, again, just as it could 
with a MOC Order. Converted shares of EMOC Orders would execute in the 
Nasdaq Closing Cross in the same manner and with the same priority as 
does a MOC Order and it would be subject to the same auxiliary, LULD 
Closing Cross, and contingency procedures as are MOC Orders. Like MOC 
Orders, converted shares of EMOC Orders that remain unexecuted after 
the Closing Cross will be canceled.
    The Exchange proposes to allow its members to enter, cancel, or 
modify EMOC Orders beginning at 9:30 a.m. ET \5\ and until immediately 
prior to 3:35 p.m. ET (or 25 minutes prior to the early closing time on 
a day when Nasdaq closes early). Exchange members would not be able to 
enter, cancel, or modify EMOC Orders at or after 3:35 p.m. (or at or 
after 25 minutes prior to the early closing time on a day when Nasdaq 
closes early).\6\
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    \5\ Nasdaq believes that accepting EMOC orders beginning at 9:30 
a.m., is appropriate because it observes that this is approximately 
the time that its members typically begin to enter regular Market on 
Close Orders.
    \6\ The QIX order entry protocol would not be available for the 
entry of an EMOC because it is used primarily for quoting purposes.
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    Pursuant to proposed Rule 4702(b)(16)(B), a Participant would be 
able to designate the Time-in-Force for an EMOC Order either by 
designating a Time-in-Force of ``On Close'' or by entering a Time-in-
Force of IOC and flagging the Order to participate in the Nasdaq 
Closing Cross.
    When entering short sale EMOC Orders, Exchange members would be 
required to mark them as ``short'' or ``short exempt'' pursuant to Rule 
4702(a). The Exchange's System would reject EMOC Orders marked 
``short,'' while it would accept and process EMOC Orders marked ``short 
exempt'' in accordance with Rule 4763. This will ensure that the 
Exchange is able to comply with its obligations under Rule 201 of 
Regulation SHO in the event that a short sale circuit breaker is 
triggered and the Nasdaq Closing Cross price is not above the national 
best bid.\7\
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    \7\ See BZX Approval Order, supra, 85 FR at 4752.
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    At 3:35 p.m. ET (or 25 minutes prior to the early closing time on a 
day when Nasdaq closes early), the System would match for execution all 
buy and sell EMOC Orders entered into the System with execution 
priority determined based on time-received.
    The Exchange would communicate information about the size of 
matched EMOC Orders as part of its Early Order Imbalance Indicator 
(``EOII'') and Order Imbalance Indicator (``NOII'').\8\

[[Page 44335]]

However, the Exchange would not discretely disclose the number of 
matched EMOC shares in the EOII and NOII. Instead, the Exchange would 
fold this information into its disclosure of the aggregate number of 
shares that have been paired at the then Current Reference Price.\9\ In 
other words, the EOII and NOII would provide an aggregate disclosure of 
the numbers of paired shares that represent EMOC, regular MOCs, Limit 
on Close, and Imbalance Only Orders. The disclosure would not specify 
the particular Order Types that the paired shares represent.\10\
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    \8\ The NOII is a message that the Exchange disseminates by 
electronic means, beginning at 3:55 p.m. ET (or 5 minutes prior to 
the early closing time on a day when Nasdaq closes early), and which 
contains information about MOC, LOC, IO, and Close Eligible Interest 
and the price at which those orders would execute at the time of 
dissemination. See Rule 4754(a)(7). The information that the NOII 
disseminates includes: (i) The ``Current Reference Price'' 
(discussed below); (ii) the number of shares represented by MOC, 
LOC, and IO orders that are paired at the Current Reference Price; 
(iii) the size of any ``Imbalance'' (i.e., the number of shares of 
buy or sell MOC or LOC orders that cannot be matched with other MOC, 
LOC, or IO order shares at a particular price at any given time); 
(iv) the buy/sell direction of any Imbalance; and (v) indicative 
prices at which the Nasdaq Closing Cross would occur if the Nasdaq 
Closing Cross were to occur at that time and the percent by which 
the indicative prices are outside the then current Nasdaq Market 
Center best bid or best offer, whichever is closer. See id.
     The EOII is an earlier message that the Exchange disseminates 
by electronic means, beginning at 3:50 p.m. ET (or 10 minutes prior 
to the early closing time on a day when Nasdaq closes early), and 
which contains all of the same categories of information as does the 
NOII, except that it excludes indicative pricing information. See 
Rule 4754(a)(10).
     The Exchange proposes to amend the definitions of the terms 
NOII and EOII so that the Rules state that they will include 
information about EMOC Orders and the price at which those Orders 
would execute at the time of dissemination.
     Nasdaq also proposes to amend the definition of ``Imbalance'' 
to include the number of shares of buy or sell EMOC Orders that 
cannot be matched with other EMOC Order shares at a particular price 
at any given time. Nasdaq notes that this definitional change will 
have no practical effect because shares of EMOC Orders that are not 
matched at 3:35 p.m. would be converted into regular MOC Orders.
    \9\ As set forth in Rule 4754(a)(7), the term ``Current 
Reference Price'' means: (i) the single price that is at or within 
the current Nasdaq Market Center best bid and offer at which the 
maximum number of shares of MOC, LOC, and IO orders can be paired; 
or (ii) if more than one such price exists, the price that minimizes 
any imbalance; or (iii) if more than one such price exists, the 
entered price at which shares will remain unexecuted in the cross; 
or (iv) if more than one such price exists, the price that minimizes 
the distance from the bid-ask midpoint of the inside quotation 
prevailing at the time of the order imbalance indicator 
dissemination. The Exchange proposes to amend the definition of the 
term ``Current Reference Price'' so that it also includes shares 
representing EMOC Orders (even though EMOC Orders would not affect 
the calculation of the Current Reference Price due to the fact that 
they would be matched prior to the calculation of the Price). Nasdaq 
proposes similar conforming changes to include EMOCs in the 
definitions of the terms ``Far Clearing Price'' and ``Near Clearing 
Price.''
    \10\ Nasdaq notes that in proposing to disseminate paired EMOC 
share information as part of its EOII and NOII, Nasdaq would afford 
market participants time to absorb that information and to act on it 
in advance of the Nasdaq Closing Cross. That said, Nasdaq does not 
believe that market participants would derive any particular benefit 
from knowing which of the aggregate paired shares reflected in the 
EOII or NOII are attributable to EMOC Orders; such a disclosure 
would not contribute to price discovery or otherwise materially 
impact participants' decisions as to whether or not to participate 
in the Nasdaq Closing Cross.
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    All matched buy and sell EMOC Orders would remain in the System 
until the Nasdaq Closing Cross occurs. The System would execute all 
previously matched buy and sell EMOC orders, at the Nasdaq Closing 
Cross Price, when the Nasdaq Closing Cross occurs.
    If the Nasdaq Closing Cross price is selected and fewer than all 
MOC, LOC, IO and Close Eligible Interest would be executed, then Orders 
will be executed at the Nasdaq Closing Cross price, with previously 
matched EMOCs executing first in priority, and then the remaining 
Orders executing pursuant to the existing priority set forth in Rule 
4754(b)(3) (as renumbered, (b)(4)). If, due to insufficient trading 
interest, no Nasdaq Closing Cross occurs in a security on a trading 
day, then the Exchange would cancel all matched EMOCs in the 
security.\11\
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    \11\ If, as of the Closing Cross cut-off time, there are matched 
EMOCs and a continuous market for a security, but there is no other 
crossing interest, then Nasdaq would conduct a Closing Cross with a 
Closing Cross price determined pursuant to 4754(b)(2)(A). This 
reflects the same procedure that the Exchange would follow in the 
event that the only closing interest in a security consisted of 
perfectly paired MOC Orders.
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    The Exchange also proposes to amend Rule 4754 to account for EMOC 
Orders in Nasdaq's auxiliary procedures and Limit-Up-Limit Down 
(``LULD'') Closing Cross. First, in the event that Nasdaq employs 
auxiliary procedures due to extraordinary volumes in the Closing 
Cross,\12\ Nasdaq proposes to subject EMOC Orders to the same 
procedures that would apply to regular MOC Orders.\13\ Second, Nasdaq 
proposes to subject EMOC Orders to the same procedures that would apply 
to regular MOC Orders in the event that it conducts an LULD Closing 
Cross in a security.\14\
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    \12\ See Rule 4754(b)(5).
    \13\ However, under proposed Rule 4754(b)(6)(A), the auxiliary 
procedures would provide that Nasdaq may end the order modification 
and cancellation periods for EMOCs as early as 3:25 p.m., whereas 
for MOCs, Nasdaq may end those periods as early as 3:40 p.m.
    \14\ See Rule 4754(b)(6). Nasdaq notes that paired EMOC shares 
participating in an LULD Closing Cross would be executed against 
each other, and then other Order Types would execute in price/time 
priority order.
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    When Systems disruptions prevent the occurrence of the Nasdaq 
Closing Cross in a security,\15\ such that Nasdaq invokes its 
contingency procedures, Nasdaq proposes to handle EMOC Orders in the 
same manner that it handles other open interest designated for the 
Nasdaq close. That is, Nasdaq proposes to cancel all EMOC orders in the 
event that an impairment causes it to invoke its contingency procedures 
because any such impairment would prevent Nasdaq from executing the 
Closing Cross in the security. Moreover, Nasdaq believes that it would 
be in the best interest of participants for the Exchange to cancel 
their matched EMOCs so as to allow participants determine how best to 
manage their orders given the circumstances that would exist under such 
a scenario.
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    \15\ See Rule 4754(b)(7).
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    Finally, Nasdaq notes that it proposes to make conforming changes 
to various provisions of the Rules, including Rule 4703(a)(1), (c), and 
(l), and Rule 4756 (a)(3).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\17\ 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, because it is an additional offering to its existing MOC 
Order type, and it will provide for a competitive alternative to the 
CMC order type. The proposed rule change would further remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system by promoting competition among national 
securities exchanges in the execution of market-on-close orders for 
Nasdaq-listed securities at the Nasdaq Closing Cross price.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    Unlike CMCs, which siphon off orders from the primary listing 
exchanges and thereby threaten to undermine the integrity of the 
primary listing exchanges' closing auction processes, the EMOC Order 
Type would have no such effects. Instead, EMOC Orders are designed to 
help keep market-on-close orders in Nasdaq-listed securities on Nasdaq, 
which is sensible given that Nasdaq is the primary listing market for 
these securities and its Closing Cross establishes their official 
closing prices. The proposal would help to ensure that Nasdaq is able 
to continue to conduct its industry-leading Closing Cross auction 
smoothly and efficiently, and without undue complexity, to the benefit 
of all participants.
    Meanwhile, participants that choose to utilize EMOC Orders could 
take comfort in knowing that Nasdaq, unlike BZX, is already experienced 
in executing market on close orders in Nasdaq-listed securities and 
that Nasdaq has a track record of doing so competently and reliably. 
Moreover, because Nasdaq's Closing Cross process is subject to the 
Commission's highest regulatory standards for security, integrity, 
reliability, and resiliency, participants can feel at ease knowing that 
Nasdaq will treat EMOC Orders with the utmost care, and that the 
Commission will hold Nasdaq accountable if it fails to do so. The BZX 
Market on Close process, on the other

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hand, is untested and subject to lower regulatory standards.\18\
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    \18\ See BZX Approval Order, supra, at 4734 (``[T]he fact that 
closing auction systems are subject to the heightened requirements 
of Regulation SCI for critical SCI systems could encourage market 
participants to send MOC orders to closing auctions on the primary 
listing exchanges due to the additional regulatory protections 
required of such systems.'').
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    The Exchange also believes that its proposed design of EMOC is 
equitable, provides for a free and open market, and is in the interests 
of investors and the public and a national market system. For example, 
Nasdaq believes that it is equitable and in the interest of investors 
to provide for unmatched shares of EMOC Orders to convert to regular 
MOC Orders at 3:35 p.m. because doing so reduces the operational risk 
for market participants relative to other alternatives such as CMC as 
they would not have to take additional action to submit new MOC Orders 
should they remain interested in participating in the Nasdaq Closing 
Cross despite the lack of a match. Meanwhile, participants that do not 
wish to proceed with MOC Orders in this instance would remain free to 
cancel or modify their orders for at least 15 minutes after conversion.
    Additionally, Nasdaq believes that it is equitable and in the 
interest of investors to cancel EMOC Orders in the event that Nasdaq 
does not conduct a Closing Cross because to do otherwise would force 
market participants to execute EMOC Orders at prices that may be stale 
\19\ and which may not reflect the true market price for such 
securities. Moreover, Nasdaq notes that this proposal is the same as 
how Nasdaq handles other open cross-only interest when no Closing Cross 
occurs.
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    \19\ If a disruption prevents the occurrence of Nasdaq Closing 
Cross, then under contingency procedures described in Rule 
4754(b)(7), the Exchange will execute orders at the Nasdaq Official 
Closing Price, which may be, under certain circumstances, the last 
consolidated last-sale eligible trade price for a security during 
regular trading hours or, if there were no such trades on the day in 
question, the Nasdaq Official Closing Price of the security on the 
prior trading day.
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    Nasdaq also believes that it is equitable and facilitates a free 
and open market to handle EMOC Orders similarly to other Order Types in 
the event of extraordinary volume at the close, insufficient trading 
interest to conduct an LULD Closing Cross in a security following an 
LULD trading pause, the occurrence of an LULD Closing Cross in a 
security, and when the Exchange applies contingency procedures.
    Lastly, Nasdaq believes that its proposal facilitates a free and 
open market incorporating into its EOII and NOII publications the 
numbers of paired shares of EMOC Orders in advance of the Nasdaq 
Closing Cross. By including EMOC paired shares information in the EOII 
and NOII publications, Nasdaq will ensure that market participants are 
adequately informed about the depth of interest in its Closing Cross at 
a point in time when they are able to act on that information by 
choosing whether to participate in the Closing Cross. Nasdaq notes that 
its proposal is consistent with the interests of investors and the 
public to simply add EMOC-related paired shares to its aggregate EOII 
and NOII disclosures of paired shares, rather than to separately 
identify the number of paired shares that are due to EMOC Orders, 
because the Exchange does not believe participants would gain any 
valuable insights from a separate disclosure. Nasdaq notes that it does 
not separately identify paired shares that are attributable to MOC or 
Limit on Close Orders.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposal would increase competition among exchanges by offering a 
competitive alternative to BZX's Market-On-Close process. Indeed, the 
proposal will offer market participants an option to enter early market 
on close orders for Nasdaq-listed stocks, while providing the added 
benefit of executing those orders in a process that is recognized for 
its reliability and which is more highly-regulated than is the BZX 
Market Close process. Moreover, unlike other offerings that siphon 
orders from the price discovery process on the primary market, Nasdaq's 
proposal will not contribute to the fragmentation of the closing 
process for Nasdaq-listed securities. Finally, EMOC would offer 
participants reduced operational risk by automatically converting their 
unmatched EMOCs to MOCs at 3:35 p.m. and retaining its original time 
priority, while still affording them the opportunity to cancel 
converted orders prior to the Closing Cross Cutoff Time.

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 (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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-037 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-2020-037. 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

[[Page 44337]]

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-2020-037, and should 
be submitted on or before August 12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15792 Filed 7-21-20; 8:45 am]
BILLING CODE 8011-01-P