Document ID: SEC-2013-0518-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2013-03-18T04:00Z

[Federal Register Volume 78, Number 52 (Monday, March 18, 2013)]
[Notices]
[Pages 16740-16743]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06153]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69120; File No. SR-NASDAQ-2013-040]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Adopt Chapter V, Section 3(d) and (e)

 March 12, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 28, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange has filed a proposed rule change for the NASDAQ 
Options Market (``NOM'') to amend Chapter V, Regulation of Trading on 
NOM, to adopt paragraph (d) to provide for how NOM proposes to treat 
orders in response to the Regulation NMS Plan to Address Extraordinary 
Market Volatility, and paragraph (e) to codify that NOM shall halt 
trading in all options overlying NMS stocks when the equities markets 
initiate a market-wide trading halt due to extraordinary market 
volatility, as described further below.
    The text of the proposed rule change is set forth below. Proposed 
new language is in italics.
* * * * *

Chapter V Regulation of Trading on NOM

* * * * *

Sec. 3 Trading Halts

    (a)-(c) No change.
    (d) This paragraph shall be in effect during a pilot period to 
coincide with the pilot period for the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be 
amended from time to time (``LULD Plan''). Capitalized terms used in 
this paragraph shall have the same meaning as provided for in the LULD 
Plan. During a Limit State and Straddle State in the Underlying NMS 
stock:
    (i) The Exchange will not open an affected option.
    (ii) After the opening, the Exchange shall reject Market Orders, as 
defined in Chapter VI, Section 1, and shall notify Participants of the 
reason for such rejection.
    (e) The Exchange shall halt trading in all options whenever the 
equities markets initiate a market-wide trading halt commonly known as 
a circuit breaker in response to extraordinary market conditions.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes: (i) to adopt Section 3(d) to provide for how 
NOM will treat orders in response to the Regulation NMS Plan to Address 
Extraordinary Market Volatility (the ``Plan''), which is applicable to 
all NMS stocks, as defined in Regulation NMS Rule 600(b)(47); and (ii) 
to adopt Section 3(e) to codify that NOM shall halt trading in all 
options when the equities markets initiate a market-wide trading halt 
due to extraordinary market volatility. The Exchange proposes to adopt 
Section 3(d) for a pilot period that coincides with the pilot period 
for the Plan.

[[Page 16741]]

Background
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the equities exchanges and the Financial Industry Regulatory Authority 
(``FINRA'') have implemented market-wide measures designed to restore 
investor confidence by reducing the potential for excessive market 
volatility. The measures adopted include pilot plans for stock-by-stock 
trading pauses,\3\ related changes to the equities market clearly 
erroneous execution rules,\4\ and more stringent equities market maker 
quoting requirements.\5\ On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis.\6\ In addition, the 
Commission approved changes to the equities market-wide circuit breaker 
rules on a pilot basis to coincide with the pilot period for the 
Plan.\7\
---------------------------------------------------------------------------

    \3\ See e.g., NASDAQ Rule 4120.
    \4\ See e.g., NASDAQ Rule 4762.
    \5\ See e.g., NASDAQ Rule 4613.
    \6\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving 
the Plan on a Pilot Basis).
    \7\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
---------------------------------------------------------------------------

    The Plan is designed to prevent trades in individual NMS stocks 
from occurring outside of specified Price Bands.\8\ As described more 
fully below, the requirements of the Plan are coupled with Trading 
Pauses to accommodate more fundamental price moves (as opposed to 
erroneous trades or momentary gaps in liquidity). All trading centers 
in NMS stocks, including both those operated by Participants and those 
operated by members of Participants, are required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the requirements specified in the 
Plan.
---------------------------------------------------------------------------

    \8\ Unless otherwise specified, capitalized terms used in this 
proposed rule change are based on the defined terms of the Plan.
---------------------------------------------------------------------------

    As set forth in more detail in the Plan, Price Bands consisting of 
a Lower Price Band and an Upper Price Band for each NMS Stock are 
calculated by the Processors.\9\ When the National Best Bid (Offer) is 
below (above) the Lower (Upper) Price Band, the Processors shall 
disseminate such National Best Bid (Offer) with an appropriate flag 
identifying it as unexecutable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors shall distribute 
such National Best Bid (Offer) with an appropriate flag identifying it 
as a Limit State Quotation.\10\ All trading centers in NMS stocks must 
maintain written policies and procedures that are reasonably designed 
to prevent the display of offers below the Lower Price Band and bids 
above the Upper Price Band for NMS stocks. Notwithstanding this 
requirement, the Processor shall display an offer below the Lower Price 
Band or a bid above the Upper Price Band, but with a flag that it is 
non-executable. Such bids or offers shall not be included in the 
National Best Bid or National Best Offer calculations.\11\ Trading in 
an NMS stock immediately enters a Limit State if the National Best 
Offer (Bid) equals but does not cross the Lower (Upper) Price Band.\12\ 
Trading for an NMS stock exits a Limit State if, within 15 seconds of 
entering the Limit State, all Limit State Quotations were executed or 
canceled in their entirety. If the market does not exit a Limit State 
within 15 seconds, then the Primary Listing Exchange would declare a 
five-minute trading pause pursuant to Section VII of the Plan, which 
would be applicable to all markets trading the security.\13\ In 
addition, the Plan defines a Straddle State as when the National Best 
Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS 
stock is not in a Limit State. For example, assume the Lower Price Band 
for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS 
stock would be in a Straddle State if the National Best Bid were below 
$9.50, and therefore unexecutable, and the National Best Offer were 
above $9.50 (including a National Best Offer that could be above 
$10.50). If an NMS stock is in a Straddle State and trading in that 
stock deviates from normal trading characteristics, the Primary Listing 
Exchange may declare a trading pause for that NMS stock if such Trading 
Pause would support the Plan's goal to address extraordinary market 
volatility.
---------------------------------------------------------------------------

    \9\ See Section V(A) of the Plan.
    \10\ See Section VI(A) of the Plan.
    \11\ See Section VI(A)(3) of the Plan.
    \12\ See Section VI(B)(1) of the Plan.
    \13\ The primary listing market would declare a Trading Pause in 
an NMS stock; upon notification by the primary listing market, the 
Processor would disseminate this information to the public. No 
trades in that NMS stock could occur during the trading pause, but 
all bids and offers may be displayed. See Section VII(A) of the 
Plan.
---------------------------------------------------------------------------

Proposed Section 3(d)
Openings
    The Exchange proposes to adopt new Section 3(d) to provide for how 
NOM shall treat orders and quotes in options overlying NMS stocks when 
the Plan is in effect. First, the Exchange proposes to adopt new 
subparagraph (i) to provide for how the Exchange shall treat the 
opening. The opening in an option will not commence in the event that 
the underlying NMS stock is open, but has entered into a Limit State or 
Straddle State. If this occurs, the opening will only commence and 
complete if the underlying NMS stock stays out of a Limit or Straddle 
State. Accordingly, new Section 3(d)(i) will provide that the Exchange 
will not open an affected option. As a result, if an opening process is 
occurring, it will cease and then start the opening process from the 
beginning once the Limit State or Straddle State is no longer 
occurring.
Orders
    Second, the Exchange proposes to adopt provisions regarding the 
treatment of certain orders if the underlying NMS stock is in a Limit 
State or Straddle State. Whenever an NMS stock is in a Limit State or 
Straddle State, trading continues; however, there will not be a 
reliable price for a security to serve as a benchmark for the price of 
the option. For example, if the underlying NMS stock is in a Limit 
State, while trading in that stock continues, by being in a Limit 
State, there will be either cancellations or executions at that price, 
and if the Limit State is not resolved in 15 seconds, the NMS Stock 
will enter a Trading Pause. If an NMS stock is in a Straddle State, 
that means that there is either a National Best Bid or National Best 
Offer that is non-executable, which could result in limited price 
discovery in the underlying NMS stock. In addition to the lack of a 
reliable underlying reference price, the Exchange is concerned about 
the width of the markets and quality of the execution for market 
participants during a Limit State or Straddle State. While the Exchange 
recognizes the importance of continued trading in options overlying NMS 
stocks during Limit States and Straddle States, the Exchange believes 
that certain types of orders increase the risk of errors and poor 
executions and therefore should not be allowed during these times when 
there may not be a reliable underlying reference price, there may be a 
wide bid/ask quotation differential, and there may be lower trading 
liquidity in the options markets.
    Therefore, the Exchange proposes that if an NMS stock is in a Limit 
State or Straddle State, once the option has opened for trading, the 
Exchange shall reject all incoming Market Orders, as defined in Chapter 
VI, Section 1, and

[[Page 16742]]

shall notify Participants of the reason for such rejection. Market 
Orders residing in the System will be handled in the normal fashion 
under Exchange rules. The Exchange believes that adding certainty to 
the treatment of Market Orders when the underlying NMS stock is in 
these situations should encourage market participants to continue to 
provide liquidity to the Exchange and thus promote a fair and orderly 
market.
Proposed Section (e)
    The Exchange also proposes to adopt Section (e), which provides 
that the Exchange shall halt trading in all options whenever the 
equities markets initiate a market-wide trading halt commonly known as 
a circuit breaker in response to extraordinary market conditions. 
Although Section 3 currently address a variety of situations involving 
halts, pauses and suspensions, the Exchange has determined to adopt a 
very specific rule to deal with circuit breaker-related halts. The 
Exchange believes that this rule can be adopted on a permanent basis, 
even though the equities circuit breakers are subject to a pilot 
program, because the proposed rule refers to such circuit breakers 
generally.
2. Statutory Basis
    NASDAQ believes that its proposal is consistent with Section 6(b) 
of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ in particular, in that it is 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, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, and, in general, 
to protect investors and the public interest, because it should provide 
certainty about how options orders and trades will be handled during 
periods of extraordinary volatility in the underlying security. 
Specifically, under the proposal, market participants will be able to 
continue to trade options overlying securities that are in a Limit 
State or Straddle State, while addressing specific order types that are 
subject to added risks during such periods. The Exchange believes that 
the rejection of options Market Orders should help to prevent 
executions that might occur at prices that have not been reliably 
formed, which should, in turn, protect, in particular, retail investors 
from executions of un-priced orders during times of significant 
volatility.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Accordingly, the Exchange believes that the proposed rule change is 
consistent with these requirements in that it should reduce the 
negative impacts of sudden, unanticipated volatility in individual 
options, and serve to preserve an orderly market in a transparent and 
uniform manner, enhance the price-discovery process, increase overall 
market confidence, and promote fair and orderly markets and the 
protection of investors.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Specifically, the proposal does not impose an intra-market burden on 
competition, because it will apply to all Options Participants. Nor 
will the proposal impose a burden on competition among the options 
exchanges, because, in addition to the vigorous competition for order 
flow among the options exchanges, the proposal addresses a regulatory 
situation common to all options exchanges. To the extent that market 
participants disagree with the particular approach taken by the 
Exchange herein, market participants can easily and readily direct 
order flow to competing venues. The Exchange believes this proposal for 
how to treat options openings and orders will not impose a burden on 
competition and will help provide certainty during periods of 
extraordinary volatility in an NMS stock.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \16\ and Rule 19b-4(f)(6) thereunder.\17\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) of the Act \18\ to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-NASDAQ-2013-040 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-NASDAQ-2013-040. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the

[[Page 16743]]

submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File No. SR-NASDAQ-2013-040 and should be 
submitted on or before April 8, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06153 Filed 3-15-13; 8:45 am]
BILLING CODE 8011-01-P