Document ID: SEC-2020-0689-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2020-04-30T04:00Z

[Federal Register Volume 85, Number 84 (Thursday, April 30, 2020)]
[Notices]
[Pages 24068-24069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09123]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88743; File No. SR-NASDAQ-2020-011]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Approving Proposed Rule Change To Amend Rules 4702(b)(14) and (b)(15) 
To Shorten the Holding Period Requirements for Midpoint Extended Life 
Orders and Midpoint Extended Life Orders Plus Continuous Book

April 24, 2020.

I. Introduction

    On February 26, 2020, 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 amend Nasdaq Rules 4702(b)(14) and (b)(15) to 
shorten the holding period requirements for Midpoint Extended Life 
Orders (``M-ELOs'') and Midpoint Extended Life Orders Plus Continuous 
Book (``M-ELO+CBs''). The proposed rule change was published for 
comment in the Federal Register on March 10, 2020.\3\ This order 
approves the proposed rule change.
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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. 88320 (March 4, 
2020), 85 FR 13962 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-nasdaq-2020-011/srnasdaq2020011.htm.
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II. Description of the Proposal

    M-ELO is an order type with a non-display order attribute that is 
priced at the midpoint between the national best bid and national best 
offer (``NBBO'') and that will not be eligible to execute until a 
holding period of one-half second (``Holding Period'') has passed after 
acceptance of the order by the system.\4\ Once a M-ELO becomes eligible 
to execute, the order may only execute against other eligible M-ELOs 
and M-ELO+CBs.\5\
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    \4\ See Nasdaq Rule 4702(b)(14).
    \5\ See id.
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    M-ELO+CB is an order type that has all of the characteristics and 
attributes of a M-ELO, except that after satisfying its Holding Period, 
in addition to executing against other eligible M-ELO+CBs and M-ELOs, 
it may also execute against certain orders on the Exchange's continuous 
book.\6\ Specifically, a M-ELO+CB may execute against non-displayed 
orders with midpoint pegging and midpoint peg post-only orders 
(collectively, ``Midpoint Orders'') resting on the Exchange's 
continuous book, if: (1) The Midpoint Order has the midpoint trade now 
order attribute enabled; (2) the Midpoint Order has rested on the 
continuous book for at least one-half second (``Resting Period'') after 
the NBBO midpoint falls within the limit price set by the participant; 
(3) no other order is resting on the continuous book that has a more 
aggressive price than the current NBBO midpoint; and (4) the Midpoint 
Order satisfies any minimum quantity requirement of the M-ELO+CB.\7\
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    \6\ See Nasdaq Rule 4702(b)(15).
    \7\ See id.
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    The Exchange now proposes to shorten the Holding Period for M-ELOs 
and M-ELO+CBs from one-half second to ten milliseconds.\8\ The Exchange 
also proposes to shorten the corresponding Resting Period for Midpoint 
Orders from one-half second to ten milliseconds.\9\ According to the 
Exchange, after observing M-ELO and M-ELO+CB trading over the past two 
years and gathering feedback from market participants (in particular, 
those that trade with a longer time horizon and are concerned with 
market impact), it has determined that the length of the Holding Period 
should be recalibrated.\10\ The Exchange states that reducing the 
Holding Period to ten milliseconds would not compromise the purpose of 
the M-ELO and M-ELO+CB order types.\11\ In particular, the Exchange 
states that it examined historical M-ELO executions and found that 
reducing the Holding Period to ten milliseconds would not have a 
material impact on its protective effect.\12\
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    \8\ See proposed Nasdaq Rule 4702(b)(14).
    \9\ See proposed Nasdaq Rule 4702(b)(15).
    \10\ See Notice, supra note 3, at 13963. The Exchange also 
states that participants have informed the Exchange that in certain 
circumstances, such as when they seek to trade symbols that on 
average have a lower time-to-execution than one-half second, they 
are reticent to enter M-ELOs and M-ELO+CBs because the Holding 
Period is too long and presents countervailing risks (i.e., the 
Holding Period is longer than necessary and participants risk losing 
out on favorable execution opportunities that would otherwise be 
available to them had they placed a non-M-ELO or M-ELO+CB order). 
See id. In addition, the Exchange states that many institutional 
routing strategies recalibrate and will route an order based on 
where trading activity is occurring, and this recalibration could 
occur before the completion of the Holding Period. See id.
    \11\ See id.
    \12\ See id.
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    The Exchange states that it will continue to conduct real-time 
surveillance to monitor the use of M-ELOs and M-ELO+CBs to ensure that 
such usage remains appropriately tied to the intent of the order 
types.\13\ If, as a result of such surveillance, the Exchange 
determines that the shortened Holding Period does not serve its 
intended purpose or adversely impacts market quality, the Exchange 
would seek to make further recalibrations.\14\
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    \13\ See id. at 13964.
    \14\ See id.
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    The Exchange intends to make the proposed changes effective in the 
second quarter of 2020 and will publish a trader alert at least 14 days 
in advance of making the proposed changes effective.\15\
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    \15\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ 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

[[Page 24069]]

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.
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    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    In its original order approving M-ELO on the Exchange, the 
Commission noted its belief that the M-ELO order type could create 
additional and more efficient trading opportunities on the Exchange for 
investors with longer investment time horizons, including institutional 
investors, and could provide these investors with an ability to limit 
the information leakage and the market impact that could result from 
their orders.\18\ In its order approving M-ELO+CB, the Commission noted 
its belief that, as with M-ELOs, M-ELO+CBs represent a reasonable 
effort to further enhance the ability of longer-term trading interest 
to participate effectively on an exchange.\19\ A commenter expressed 
concern that the proposal would defeat the original intent of M-ELOs 
and that M-ELOs would lose a significant amount of protection as a 
result of the shortened Holding Period.\20\ The commenter asked how the 
Exchange determined to propose the ten-millisecond Holding Period, and 
expressed its belief that the proposal would result in more information 
leakage and therefore most long-term investors would decide to no 
longer use M-ELOs.\21\ In response, the Exchange disagreed that the 
proposal would cause M-ELOs and M-ELO+CBs to lose a significant amount 
of protection to the detriment of long-term investors and referenced 
the discussion in the Notice regarding how the Exchange selected the 
proposed ten-millisecond Holding Period.\22\ The Exchange also stated 
that even if the commenter was correct in asserting that the proposal 
would diminish the protective power of M-ELOs and M-ELO+CBs, that 
conclusion should have no bearing on whether the proposal is consistent 
with the Act.\23\
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    \18\ See Securities Exchange Act Release No. 82825 (March 7, 
2018), 83 FR 10937, 10938-39 (March 13, 2018) (order approving SR-
NASDAQ-2017-074).
    \19\ See Securities Exchange Act Release No. 86938 (September 
11, 2019), 84 FR 48978, 48980-81 (September 17, 2019) (order 
approving SR-NASDAQ-2019-048).
    \20\ See letter from Sal Arnuk and Joseph Saluzzi, Partners and 
Co-Founders, Themis Trading LLC, to Vanessa Countryman, Secretary, 
Commission, dated April 14, 2020 (``Themis Letter'').
    \21\ See id. at 3. The commenter further believes that, if the 
proposal is approved by the Commission, brokers that utilize M-ELOs 
should notify their clients of the change. See id.
    \22\ See letter from Brett M. Kitt, Associate Vice President and 
Principal Senior Associate General Counsel, Nasdaq, to Vanessa 
Countryman, Secretary, Commission, dated April 21, 2020 (``Nasdaq 
Response Letter''). See also Notice, supra note 3, at 13963.
    \23\ See Nasdaq Response Letter, supra note 22, at 2. The 
Exchange also sought to correct certain M-ELO trading volume 
statistics included in the Themis Letter. See id.
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    The Commission notes that, with the proposed ten-millisecond 
Holding Period and Resting Period, M-ELOs and M-ELO+CBs would continue 
to be optional order types that are available to investors with longer 
investment time horizons, including institutional investors. The 
Commission also believes that the proposal could make M-ELOs and M-
ELO+CBs more attractive for securities that on average have a time-to-
execution of less than one-half second and, for investors who currently 
do not use M-ELOs and M-ELO+CBs for these securities, provide optional 
order types that could enhance their ability to participate effectively 
on the Exchange. The Commission notes that, if market participants 
determine that the proposal would make M-ELOs and M-ELO+CBs less 
attractive for their particular investment objectives, such market 
participants may elect to reduce or eliminate their use of these 
optional order types. Moreover, as noted above, the Exchange will 
continue to conduct real-time surveillance to monitor the use of M-ELOs 
and M-ELO+CBs to ensure that such usage remains appropriately tied to 
the intent of the order types.\24\ If, as a result of such 
surveillance, the Exchange determines that the shortened Holding Period 
does not serve its intended purpose or adversely impacts market 
quality, the Exchange would seek to make further recalibrations.\25\
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    \24\ See supra note 13 and accompanying text.
    \25\ See supra note 14 and accompanying text.
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    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NASDAQ-2020-011) be, and 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09123 Filed 4-29-20; 8:45 am]
 BILLING CODE 8011-01-P