Document ID: SEC-2017-1264-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2017-07-27T04:00Z

[Federal Register Volume 82, Number 143 (Thursday, July 27, 2017)]
[Notices]
[Pages 35014-35019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15775]

[[Page 35014]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81188; File No. SR-NASDAQ-2017-061]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Exchange Rules 4702 
and 4754 To Enhance the Nasdaq Closing Cross

July 21, 2017.
    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 July 13, 2017, 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 amend Rule 4702 (Order Types) and Rule 
4754 (Nasdaq Closing Cross) to enhance the Nasdaq Closing Cross by 
permitting members to submit LOC Orders until immediately prior to 3:55 
p.m. ET subject to certain conditions, and to make other changes 
related to Closing Cross/Extended Hours Orders.
    The text of the proposed rule change is available on the Exchange's 
Web site 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 purpose of the proposed rule change is to amend Rule 4702 
(Order Types) and Rule 4754 (Nasdaq Closing Cross) to enhance the 
Nasdaq Closing Cross by permitting members to submit Limit On Close 
(``LOC'') Orders \3\ after the current 3:50 p.m. ET cutoff, and to make 
other changes related to Closing Cross/Extended Hours Orders. As 
proposed, LOC Orders entered after the current 3:50 p.m. ET cutoff and 
immediately prior to 3:55 p.m. ET will be accepted to participate in 
the Nasdaq Closing Cross provided that certain conditions are met. The 
Nasdaq Closing Cross is the process for determining the price at which 
orders shall be executed at the close and for executing those 
orders.\4\ The Exchange believes that permitting members to enter LOC 
Orders later in the trading day will encourage additional participation 
in the Nasdaq Closing Cross, thereby reducing Imbalances,\5\ and 
increasing the quality of the cross. Furthermore, the Exchange believes 
that the other changes related to Closing Cross/Extended Hours Orders 
will align the Exchange's on-close order handling with member 
expectations and the characteristics of those order types.
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    \3\ A ``Limit On Close Order'' or ``LOC Order'' is an Order Type 
entered with a price that may be executed only in the Nasdaq Closing 
Cross, and only if the price determined by the Nasdaq Closing Cross 
is equal to or better than the price at which the LOC Order was 
entered. See Rule 4702(b)(12).
    \4\ See Rule 4754(a)(6).
    \5\ ``Imbalance'' means the number of shares of buy or sell MOC 
or LOC Orders that cannot be matched with other MOC or LOC, or IO 
Order shares at a particular price at any given time. See Rule 
4754(a)(2). The definition above includes rule corrections made in 
this proposed rule change.
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Background
    The Nasdaq Closing Cross provides a transparent auction process 
that determines a single price for the close. The price determined by 
the Nasdaq Closing Cross is also the Nasdaq Official Closing Price for 
stocks that participate in the cross. Members can submit LOC Orders, 
Market On Close (``MOC'') Orders,\6\ and Imbalance Only (``IO'') Orders 
\7\ that are available to participate in the Closing Cross along with 
other Close Eligible Interest.\8\ Today, MOC and LOC Orders may be 
entered, cancelled, and/or modified between 4:00 a.m. ET and 
immediately prior to 3:50 p.m. ET. IO Orders may be entered between 
4:00 a.m. ET until the time of execution of the Nasdaq Closing Cross, 
but may not be cancelled or modified at or after 3:50 p.m. ET (with 
limited exceptions to correct a legitimate error), and members can also 
enter other Close Eligible Interest on the continuous book up until the 
time of the cross. At 3:50 p.m. ET, the Exchange stops accepting MOC 
and LOC Orders and begins disseminating an Order Imbalance Indicator 
\9\ that contains information about the Closing Cross, including the 
Current Reference Price,\10\ the number of paired shares at that price, 
the size and side of any Imbalance, Near and Far Clearing Prices,\11\ 
and a market buy or market sell indicator.12 13 At 4:00 p.m. 
ET, the Exchange will execute the Nasdaq Closing Cross at a price 
determined in accordance with Rule 4754(b)(2),\14\ and disseminate the 
executions via the consolidated tape.\15\ To ensure the best experience 
for market

[[Page 35015]]

participants that trade in the Nasdaq Closing Cross, or use the Nasdaq 
Official Closing Price determined by the cross, the Exchange now 
proposes to introduce functionality that permits members to enter LOC 
Orders between the current 3:50 p.m. ET cutoff and immediately prior to 
3:55 p.m. ET. The proposed functionality is described in detail in the 
following sections of the proposed rule change.
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    \6\ A ``Market On Close Order'' or ``MOC Order'' is an Order 
Type entered without a price that may be executed only during the 
Nasdaq Closing Cross. See Rule 4702(b)(11).
    \7\ An ``Imbalance Only Order'' or ``IO Order'' is an Order 
entered with a price that may be executed only in the Nasdaq Closing 
Cross and only against MOC Orders or LOC Orders. See Rule 
4702(b)(13).
    \8\ ``Close Eligible Interest'' means any quotation or any order 
that may be entered into the system and designated with a time-in-
force of SDAY, SGTC, MDAY, MGTC, SHEX, or GTMC. See 4754(a)(1).
    \9\ ``Order Imbalance Indicator'' means a message disseminated 
by electronic means containing information about MOC, LOC, IO, and 
Close Eligible Interest and the price at which those orders would 
execute at the time of dissemination.
    \10\ ``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. (ii) If more than one price exists under 
subparagraph (i), the Current Reference Price shall mean the price 
that minimizes any Imbalance. (iii) If more than one price exists 
under subparagraph (ii), the Current Reference Price shall mean the 
entered price at which shares will remain unexecuted in the cross. 
(iv) If more than one price exists under subparagraph (iii), the 
Current Reference Price shall mean 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. See Rule 4754(a)(7)(A). The definition above includes 
rule corrections made in this proposed rule change.
    \11\ The Near Clearing Price and Far Clearing Price are 
indicative prices at which the Nasdaq Closing Cross would occur if 
it were to occur at that time. Specifically, the ``Far Clearing 
Price'' is the price at which MOC, LOC, and IO Orders would execute, 
and the ``Near Clearing Price'' is the price at which MOC, LOC, IO, 
and Close Eligible Interest would execute. See Rule 
4754(a)(7)(E)(i)-(ii).
    \12\ An indicator for ``market buy'' or ``market sell'' is 
disseminated if marketable buy (sell) shares would remain unexecuted 
above (below) the Near Clearing Price or Far Clearing Price. See 
Rule 4754(a)(7)(E)(iii).
    \13\ See Rules 4754(a)(7), (b)(1). The Exchange disseminates the 
Order Imbalance Indicator every 5 seconds beginning at 3:50 p.m. ET 
until market close.
    \14\ See Rule 4754(b)(2). Orders and quotes executed in the 
Nasdaq Closing Cross are allocated based on the priority described 
in Rule 4754(b)(3).
    \15\ See Rule 4754(b)(4).
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Acceptance of LOC Orders
    The Nasdaq Closing Cross was designed to create a robust close that 
allows for efficient price discovery through a transparent auction 
process. To permit additional interest to participate in the Nasdaq 
Closing Cross, and increase the quality of the cross, the Exchange 
proposes to allow LOC Orders to be entered until immediately prior to 
3:55 p.m. ET in certain circumstances. Specifically, the Exchange 
proposes to allow LOC Orders to be entered between 3:50 p.m. ET and 
immediately prior to 3:55 p.m. ET if there is a Current Reference Price 
in the first Order Imbalance Indicator disseminated at or after 3:50 
p.m. ET (``First Reference Price'').\16\ The presence of a First 
Reference Price indicates that there is matched buy and sell interest 
that is eligible to participate in the Nasdaq Closing Cross. When there 
is matched interest available to participate in the close, the Exchange 
believes that allowing members to continue to enter LOC Orders after 
the current 3:50 p.m. ET cutoff will facilitate a more efficient 
closing auction by allowing additional priced interest to participate 
in the close. When there is no First Reference Price, there is no 
matched buy and sell interest that is eligible to participate in the 
Nasdaq Closing Cross, and therefore no need to continue to accept LOC 
Orders. The Exchange believes that it is appropriate to allow members 
to enter LOC Orders later in the trading day where market conditions 
suggest that allowing additional interest to participate may serve to 
reduce Imbalances and increase the quality of the Nasdaq Closing Cross.
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    \16\ If there is no First Reference Price a value of zero will 
be disseminated in the first Order Imbalance Indicator. A value 
other than zero in this message indicates that there is a First 
Reference Price.
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Re-Pricing of LOC Orders
    While all LOC Orders must be entered with a limit price, the 
Exchange proposes to re-price LOC Orders entered after the current 3:50 
p.m. ET cutoff to the less aggressive of the order's limit price or the 
First Reference Price in order to prevent these orders from having a 
significant impact on the price established by the Nasdaq Closing 
Cross. Specifically, an LOC Order entered between 3:50 p.m. ET and 
immediately prior to 3:55 p.m. ET will be accepted at its limit price, 
unless its limit price is higher (lower) than the First Reference Price 
for an LOC Order to buy (sell), in which case the LOC Order will be re-
priced to the First Reference Price; provided that if the First 
Reference Price is not at a permissible minimum increment of $0.01 or 
$0.0001, as applicable, the First Reference Price will be rounded (i) 
to the nearest permitted minimum increment (with midpoint prices being 
rounded up) if there is no imbalance, (ii) up if there is a buy 
imbalance, or (iii) down if there is a sell imbalance.\17\ The Exchange 
proposes to use the First Reference Price to price these LOC Orders 
because they are designed to reduce Imbalances without having a 
significant impact on the price of the cross. For this reason, the 
Exchange will also only re-price these LOC Orders using the First 
Reference Price even when there is a newer Current Reference Price 
available, as re-pricing based on updated prices may decrease stability 
of the cross price, which is counter to the intent of this proposed 
rule change.
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    \17\ The Exchange proposes to use natural rounding when there is 
no imbalance. When there is an imbalance the Exchange will round 
such that more offsetting interest can participate. Thus, where 
there is a buy imbalance the Exchange will round the First Reference 
Price up to allow more sell interest to participate, and when there 
is a sell imbalance the Exchange will round the First Reference 
Price down to allow more buy interest to participate. For example, 
if there is a sell imbalance, a First Reference Price of $10.015 
would be rounded down to $10.01. Re-pricing based on a price of 
$10.01 would allow additional buy orders to offset the sell 
imbalance at that price when they may be excluded at a price of 
$10.02.
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Alternative Closing Procedures
    In addition to the Nasdaq Closing Cross described above, the 
Exchange operates an LULD Closing Cross and Primary Contingency 
Procedures that provide alternative processes for executing closing 
trades on Nasdaq.\18\ The LULD Closing Cross is employed when a Trading 
Pause pursuant to Rule 4120(a)(12) is triggered at or after 3:50 p.m. 
ET and before 4:00 p.m. ET.\19\ The Exchange proposes to specify in its 
rules that MOC, LOC, and IO Orders intended for the Nasdaq Closing 
Cross entered into the system and placed on the book prior to the 
Trading Pause will remain on the book to participate in the LULD 
Closing Cross. With this change, LOC Orders that are now available to 
be entered after the current 3:50 p.m. ET cutoff will be able to 
participate in the LULD Closing Cross. When the Exchange is conducting 
an LULD Closing Cross, LOC Orders would be eligible to be entered until 
the earlier of the Trading Pause and immediately prior to 3:55 p.m. 
ET.\20\ In addition, the rule will be amended to correctly state that 
all IO Orders that are entered prior to the Trading Pause will 
participate in the LULD Closing Cross, instead of only those IO Orders 
entered prior to 3:50 p.m. ET, which is consistent with current 
functionality.\21\ The Exchange's intent has always been to include all 
MOC, LOC, and IO Orders that are entered and accepted in the LULD 
Closing Cross. Similarly, the Exchange's rules also provide for Primary 
Contingency Procedures in the event that a disruption occurs that 
prevents the execution of the Nasdaq Closing Cross. In such instances, 
the Exchange segregates MOC and LOC Orders entered prior to 3:50 p.m. 
ET and IO Orders entered prior to 4:00 p.m. ET for participation in the 
Contingency Closing Cross. Since members will be able to submit LOC 
Orders up to immediately prior to 3:55 p.m. ET, the Exchange proposes 
to amend its rule for Primary Contingency Procedures to provide that 
LOC Orders entered prior to 3:55 p.m. ET are eligible to participate. 
Finally, to ensure a fair and orderly market, the Exchange employs 
certain Auxiliary Procedures when significant trading volume is 
expected at the close of market hours. Although the Exchange is not 
proposing any substantive changes to its Auxiliary Procedures, it is 
correcting an incorrect cross reference in that rule. In particular, 
Rule 4754(b)(5)(D) provides that the

[[Page 35016]]

Exchange can adjust the threshold value set forth in subparagraph 
(c)(2)(D) to no greater than 20 percent when Auxiliary Procedures are 
employed. The Exchange proposes to correct this cross reference, which 
should instead point to subparagraph (b)(2)(E), which provides that if 
the Nasdaq Closing Cross price is outside benchmarks established by 
Nasdaq by a threshold amount, the cross will occur at the price within 
those thresholds that best satisfies to [sic] other conditions of the 
rule.
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    \18\ The Exchange also employs Secondary Contingency Procedures, 
which are available if both the standard procedures and the Primary 
Contingency Procedures are unavailable. The Exchange is not 
proposing any changes to the Secondary Contingency Procedures as 
these procedures do not involve the execution of closing trades on 
Nasdaq. See Rule 4754(b)(8).
    \19\ A recently approved but not yet operative proposed rule 
change amends this section to provide that the LULD Closing Cross is 
employed when a Trading Pause pursuant to Rule 4120(a)(12) exists at 
or after 3:50 p.m. ET and before 4:00 p.m. ET. See Securities 
Exchange Act Release No. 79876 (January 25, 2017), 82 FR 8888 
(January 31, 2017) (SR-NASDAQ-2016-131). The discussion in this 
proposed rule change is based on currently implemented 
functionality.
    \20\ The Exchange also proposes to remove a reference in Rule 
4754(b)(6)(C)(iii) that states that MOC or LOC Orders ``may not be 
submitted after 3:50.'' This conforming change is being made because 
members will now be permitted to submit LOC orders that would 
participate in the LULD Closing Cross if entered prior to the 
earlier of the Trading Pause and immediately prior to 3:55 p.m. ET 
as discussed in this filing.
    \21\ MOC Orders entered after 3:50 p.m. ET will continue to be 
rejected, and therefore would not be eligible for the LULD Closing 
Cross. See Rule 4702(b)(11)(A).
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Closing Cross/Extended Hours Orders
    The Exchange also proposes to make two changes with respect to 
Closing Cross/Extended Hours Orders: (1) To clarify handling of certain 
order types that are not eligible to participate in the Nasdaq Closing 
Cross as Closing Cross/Extended Hours Orders, and to add Market Maker 
Peg Orders to that list; and (2) to remove language regarding 
conversion of Closing Cross/Extended Hours Orders entered between 3:50 
p.m. ET and the time of the Nasdaq Closing Cross. A Closing Cross/
Extended Hours Order is an order that is flagged to participate in the 
Nasdaq Closing Cross and entered with a time-in-force that continues 
after the cross. Such orders are typically treated as LOC Orders for 
participation in the Nasdaq Closing Cross and then operate pursuant to 
their order type and attributes.
    Today, Rule 4702(b)(12)(B) states that, following the Nasdaq 
Closing Cross, a Closing Cross/Extended Hours Order may not operate as 
a Post-Only Order, Midpoint Peg Post-Only Order, Supplemental Order, 
Retail Order, or RPI Order. As written, this rule could be interpreted 
as implying that a member could enter these order types with an on-
close instruction and would participate in the Nasdaq Closing Cross and 
thereafter not be eligible for extended hours trading. In fact, 
although these orders are eligible to participate in the Nasdaq Closing 
Cross when entered on the continuous book, Post-Only Orders, Midpoint 
Peg Post-Only Orders, Supplemental Orders, and Retail Orders, cannot be 
entered with a flag designating an on-close instruction, and therefore 
cannot operate as a Closing Cross/Extended Hours Order. Furthermore, 
RPI Orders are not currently offered on the Exchange. The Exchange 
therefore proposes to clarify the rule so that it is more transparent 
to members that a Post-Only Order, Midpoint Peg Post-Only Order, 
Supplemental Order, or Retail Order, may not operate as a Closing 
Cross/Extend Hours Order. In addition, the rule states that, in the 
case of a Market Maker Peg Order entered prior to 3:50 p.m. ET that is 
also designated to participate in the Nasdaq Closing Cross, the price 
of the Order for purposes of operating as an LOC Order will be 
established on entry and will not thereafter be pegged until after the 
completion of the Nasdaq Closing Cross. While this is consistent with 
current system behavior, the Exchange no longer believes that Market 
Maker Peg Orders should be eligible to be entered with a flag 
designating an on-close instruction, and thereby designated as Closing 
Cross/Extended Hours Orders, similar to the other order types mentioned 
above. Furthermore, members do not typically enter these orders with 
such an instruction. The Exchange therefore proposes to specify that a 
Market Maker Peg Order may not operate as a Closing Cross/Extended 
Hours Order.
    Rule 4702(b)(12)(B) also states that a Closing Cross/Extended Hours 
Order that is entered between 3:50 p.m. ET and the time of the Nasdaq 
Closing Cross is (i) rejected if it has been assigned a Pegging 
Attribute, (ii) treated as an IO Order and then entered into the System 
after the completion of the Nasdaq Closing Cross if entered through 
RASH, QIX, or FIX but not assigned a Pegging Attribute, and (iii) 
treated as an IO Order and cancelled after the Nasdaq Closing Cross if 
entered through OUCH or FLITE. The Exchange now believes that members 
would be better served by functionality that does not convert these 
Closing Cross/Extended Hours Orders to IO Orders and therefore proposes 
to remove the language in (ii) and (iii) above from its rules.\22\ The 
Exchange believes that this change is more consistent with member's 
expectations when entering orders that are expected to trade as LOC 
Orders but would be converted to IO Orders in the system today. A 
Closing Cross/Extended Hours Order that is entered between 3:50 p.m. ET 
and the time of the Nasdaq Closing Cross will continue to be rejected 
pursuant to (i) above if it has been assigned a Pegging Attribute.
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    \22\ As an additional conforming change, the Exchange is also 
amending a reference in Rule 4702(b)(12)(B) that states that ``[a]ll 
other LOC Orders and Closing Cross/Extended Hours Orders entered at 
or after 3:50 p.m. ET will be rejected'' to reflect the proposed 
time period for entering LOC Orders, which will now be until 
immediately prior to 3:55 p.m. ET.
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Order Imbalance Indicator
    As described in other parts of this filing, the Exchange 
disseminates an Order Imbalance Indicator beginning at 3:50 p.m. ET 
that includes several data elements to provide information about the 
Nasdaq Closing Cross to market participants. These data elements 
include the Current Reference Price and the number of shares that are 
paired at the Current Reference Price. Currently, the rule states that 
the Current Reference Price is based on 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, IO and Close Eligible Interest 
can be paired (with certain tie-breakers if multiple prices meet this 
criterion). In addition, the rule states that the paired shares data 
element indicates the number of shares represented by MOC, LOC, IO and 
Close Eligible Interest that are paired at the Current Reference Price. 
The Exchange notes, however, that the Order Imbalance Indicator has 
never included Close Eligible Interest in determining the Current 
Reference Price or the number of paired shares at that price. The 
Exchange therefore proposes to amend this rule to state that the 
Exchange will disseminate a Current Reference Price based on 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, and a paired share count based on the number of 
shares represented by MOC, LOC, and IO Orders that are paired at the 
Current Reference Price. With these changes, Rule 4754(a)(7)(B) will 
correctly reflect the information disseminated to market participants. 
In addition, the Exchange notes that Rule 4752(a)(2)(B) contains a 
similar error in including Open Eligible Interest in the Current 
Reference Price calculation and paired share count for the Nasdaq 
Opening Cross. The Exchange therefore proposes to correct that rule as 
well. With these changes, Rule 4752(a)(2)(B) will correctly indicate 
that the Exchange will disseminate a Current Reference Price based on 
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 MOO, LOO, 
OIO, and Early Market Hours orders can be paired, and a paired share 
count based on the number of shares represented by MOO, LOO, OIO, and 
Early Market Hours orders that are paired at the Current Reference 
Price.
    Finally, the Order Imbalance Indicator includes the size of any 
Imbalance. Currently, Imbalance is defined in Rule 4754(a)(2) as ``the 
number of shares of buy or sell MOC or LOC Orders that cannot be 
matched with other MOC or LOC, Close Eligible Interest or IO Order 
shares at a particular price at any given time.'' Although the rule 
states that

[[Page 35017]]

Close Eligible Interest is used when determining an Imbalance, in 
practice, similar to the Current Reference Price calculation and paired 
share count described above, the Imbalance calculation has never 
included Close Eligible Interest. The Exchange therefore proposes to 
remove the incorrect reference to Close Eligible Interest in the rule. 
As proposed, Imbalance will be correctly defined as ``the number of 
shares of buy or sell MOC or LOC Orders that cannot be matched with 
other MOC or LOC, or IO Order shares at a particular price at any given 
time.'' In addition, the Exchange notes that Rule 4752(a)(1) contains a 
similar error in including Open Eligible Interest in the Imbalance 
calculation for the Nasdaq Opening Cross. The Exchange therefore 
proposes to correct that rule as well. With this change, Rule 
4752(a)(1) will correctly define an Imbalance for the Nasdaq Opening 
Cross as ``the number of shares of buy or sell MOO, LOO or Early Market 
Hours orders that may not be matched with other MOO, LOO, Early Market 
Hours, or OIO order shares at a particular price at any given time.''
Implementation
    The Exchange proposes to launch the functionality described in this 
proposed rule change in either Q3 or Q4 2017 pursuant to a symbol-by-
symbol rollout. The Exchange will announce the implementation date of 
this functionality and the symbol rollout in an Equity Trader Alert 
issued to members prior to the launch date.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\23\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\24\ 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.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the introduction of the proposed LOC 
Order functionality will remove impediments to and perfect the 
mechanism of a free and open market as this proposed change is designed 
to increase the quality of the Nasdaq Closing Cross. The Nasdaq Closing 
Cross provides an industry-leading, transparent price discovery process 
that aggregates a large pool of liquidity, across a variety of order 
types, in a single venue. The Exchange believes that increasing 
participation in the Nasdaq Closing Cross by offering the proposed LOC 
Order enhancement will further promote price discovery and 
participation at the close by allowing additional priced interest to be 
submitted for the close. In addition to providing a mechanism for 
members to execute closing interest, the Nasdaq Closing Cross also 
generates a closing price that is used widely throughout the industry 
for a variety of purposes including index and mutual fund valuations. 
The Exchange therefore believes that it is important to ensure that the 
Nasdaq Closing Cross provides the best possible experience for members 
and investors that rely on the cross and the closing prices it 
generates.
    Allowing members to enter LOC Orders later in the trading day will 
enhance the Nasdaq Closing Cross by increasing participation, and 
reducing the frequency of Imbalances that may increase volatility of 
the closing cross price. Currently, members that have interest to 
execute at the closing price have more limited options in submitting 
that interest after 3:50 p.m. ET when the time window for entering MOC 
and LOC Orders has closed. Specifically, these members must either 
submit IO Orders, which do not trade if there is no Imbalance and do 
not maintain price priority since they are continuously re-priced to 
the best bid or offer, or must submit regular orders to the continuous 
book, where they may execute before the cross begins. Member feedback 
has indicated that a longer period for the entry of LOC Orders would be 
beneficial for firms that participate in the close. The proposed 
functionality would allow firms to maintain price standing when 
providing liquidity intended for the Nasdaq Closing Cross, allowing 
potentially better trading outcomes for firms, and thereby encouraging 
additional interest to participate in the cross. The proposed rule 
change is therefore likely to improve price discovery and the stability 
of the Nasdaq Closing Cross to the benefit of all market participants. 
The Exchange believes that the proposed 3:55 p.m. ET cutoff for 
submitting LOC Orders appropriately balances the need for members to 
submit interest for the Nasdaq Closing Cross later in the trading day 
with the need for a stable cross.
    Since the proposed functionality is designed to reduce Imbalances 
and create a more efficient cross, the Exchange will only accept these 
orders where there is a First Reference Price. As previously explained, 
the presence of a First Reference Price indicates that there is matched 
interest that is eligible to participate in the Nasdaq Closing Cross. 
The Exchange believes that this is when it is most helpful to allow 
additional interest intended for the cross as new LOC Orders can be 
used to decrease Imbalances and facilitate a more efficient closing 
auction to the benefit of members and investors. The proposed 
functionality has been designed to reduce Imbalances that may exist 
during the closing process, and is not intended to create Imbalances 
where there is no interest that is eligible to participate in the 
cross. Thus, the Exchange believes that accepting LOC Orders between 
3:50 p.m. ET and immediately prior to 3:55 p.m. ET only when there is a 
First Reference Price is consistent with the protection of investors 
and the public interest. The Exchange believes that it is appropriate 
to allow members to enter LOC Orders until immediately prior to 3:55 
p.m. ET where market conditions suggest that allowing additional 
interest to participate may serve to reduce Imbalances and increase the 
quality of the Nasdaq Closing Cross. Furthermore, if members wish to 
have their LOC Orders participate in the Nasdaq Closing Cross 
regardless of whether there is a First Reference Price they can 
continue to enter that interest prior to 3:50 p.m. ET.
    To ensure more price stability in the Nasdaq Closing Cross, the 
Exchange is also proposing to re-price LOC Orders entered after 3:50 
p.m. ET to the First Reference Price in circumstances where the order's 
limit price is more aggressive than the First Reference Price. The 
Exchange believes that re-pricing LOC Orders entered after the regular 
cutoff is consistent with just and equitable principles of trade 
because the proposed functionality is designed to reduce Imbalances 
without having a significant impact on the price determined by the 
cross. At the time it is disseminated, the First Reference Price 
represents the price, bounded by the continuous market, where the 
maximum number of on-close shares can be paired. The Exchange believes 
that it is appropriate to re-price to this price, provided that it is 
within the order's limit price. This will allow orders to coalesce 
around this price, creating additional liquidity, and potentially 
reducing Imbalances. Furthermore, to the extent that members do not 
want their LOC Orders re-priced, they can continue to submit LOC Orders 
before the 3:50 p.m. cutoff. Thus, the Exchange believes that it is 
consistent with the protection of investors and the public interest to 
re-price LOC Orders

[[Page 35018]]

entered after 3:50 p.m. ET such that they contribute to available 
interest eligible to participate in the cross, without the potential to 
significantly increase volatility in the closing cross price.
    The Exchange also believes that it is consistent with the public 
interest and the protection of investors to allow LOC Orders entered 
after the regular 3:50 p.m. ET cutoff to participate in the LULD 
Closing Cross and Primary Contingency Procedures. The LULD Closing 
Cross is employed by the Exchange when a Trading Pause is triggered at 
or after 3:50 p.m. ET and before 4:00 p.m. ET, and today includes LOC 
Orders submitted prior to the current 3:50 p.m. ET cutoff. With the 
proposed changes to allow members to submit LOC Orders later in the 
trading day, LOC Orders entered after the regular 3:50 p.m. ET cutoff 
will also be permitted to trade in the LULD Closing Cross provided that 
they have been entered into the system and placed on the book prior to 
the pause.\25\ IO Orders that are entered prior to the Trading Pause 
are also eligible to trade in the LULD Closing Cross today, and the 
changes being made to that section reflect this. The Exchange believes 
that the changes with respect to IO Orders are consistent with public 
interest and protection of investors as this change is being made to 
avoid member confusion about what interest is eligible for the LULD 
Closing Cross in the event that this procedure is used by the Exchange. 
Similarly, the Primary Contingency Procedures are employed when a 
disruption occurs that prevents the execution of the Nasdaq Closing 
Cross, and today also includes LOC Orders entered prior to 3:50 p.m. 
ET. Since LOC Orders may now be accepted later in the trading day, 
those orders will now also be allowed to participate in the Primary 
Contingency Procedures. The Exchange believes that allowing these later 
LOC Orders to participate in the LULD Closing Cross and Primary 
Contingency Procedures will promote just and equitable principles of 
trade and perfect the mechanism of a free and open market. Finally, 
with respect to the changes for Auxiliary Procedures, the Exchange 
notes that it is only changing an incorrect cross reference, which will 
benefit members by ensuring that the Exchange's rulebook is accurate. 
No substantive changes are being made to this provision.
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    \25\ As noted previously in this filing, the Exchange is also 
removing a reference in Rule 4754(b)(6)(C)(iii) that states that MOC 
or LOC Orders ``may not be submitted after 3:50'' because members 
will now be permitted to submit LOC orders that would participate in 
the LULD Closing Cross if entered prior to the earlier of the 
Trading Pause and immediately prior to 3:55 p.m. ET.
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    The Exchange also believes that the proposed changes related to 
Closing Cross/Extended Hours Orders are consistent with the protection 
of investors and the public interest. With respect to handling of 
Market Maker Peg Orders entered with an on-close instruction, the 
Exchange believes that the proposed functionality, which is to reject 
the order, is more consistent with member expectations. The Exchange 
does not believe that members want functionality that allows Market 
Maker Peg Orders to be entered with a flag designating an on-close 
instruction and which would therefore operate as Closing Cross/Extended 
Hours Orders. Furthermore, this is consistent with the Exchange's 
review of this order type, which indicates that members enter this 
combination very rarely. Market Maker Peg Orders were designed to 
assist members in meeting their quoting obligations and not as a means 
of submitting interest flagged with an on-close instruction. The 
Exchange also believes that the other changes to this rule to clarify 
that a Post-Only Order, Midpoint Peg Post-Only Order, Supplemental 
Order, or Retail Order, may not operate as a Closing Cross/Extend Hours 
Order will benefit members by increasing transparency with respect to 
order handling. No changes are being made to the trading system to 
implement this change; this change merely clarifies current 
functionality offered on the Exchange. Finally, with respect to Closing 
Cross/Extended Hours Orders entered between 3:50 p.m. ET and the time 
of the Nasdaq Closing Cross, the Exchange believes that it is 
consistent with the public interest and the protection of investors to 
no longer offer functionality that converts these orders to IO Orders. 
With the proposed changes for LOC Orders, members will be able to enter 
LOC Orders up until 3:55 p.m. ET instead of the current 3:50 p.m. ET 
cutoff. After 3:55 p.m. ET, the Exchange believes that members would 
rather have their Closing Cross/Extended Hours Orders rejected like 
other LOC Orders rather than treated as IO Orders, which do not trade 
if there is no Imbalance and do not maintain price priority since they 
are continuously re-priced to the best bid or offer. The Exchange 
therefore believes that the proposed change is designed to promote just 
and equitable principles of trade.
    Finally, the Exchange believes that the proposed changes related to 
the information disseminated in the Order Imbalance Indicator for both 
the closing and opening processes is consistent with the public 
interest and the protection of investors because these changes more 
accurately reflect the information currently disseminated. Today, the 
Order Imbalance Indicator for the Nasdaq Closing Cross does not include 
Close Eligible Interest in its calculation of the Current Reference 
Price or the paired share count. Similarly, the Order Imbalance 
Indicator for the Nasdaq Opening Cross does not include Open Eligible 
Interest for either of those data elements. In each case, the Exchange 
believes that it is more appropriate to exclude Close or Open Eligible 
Interest from the Current Reference Price calculation and paired share 
count disseminated to market participants as these orders may be 
executed in the continuous market before the closing or opening auction 
commences. The Exchange believes that updating its rule to accurately 
reflect the information disseminated to market participants will 
increase transparency surrounding these processes, and is therefore 
designed to promote just and equitable principles of trade. In 
addition, with respect to the definition of Imbalance, the Exchange 
notes that, similar to the Current Reference Price and paired share 
count, the Imbalance calculation does not include Close Eligible 
Interest for the Nasdaq Closing Cross or Open Eligible Interest for the 
Nasdaq Opening Cross. For the same reasons described above, the 
Exchange believes that it is appropriate to not include interest that 
could be executed in the continuous market prior to the closing or 
opening auction in the Imbalance calculation. The Exchange believes 
that updating these rules will increase transparency to the benefit of 
members and other market participants, and is therefore designed to 
promote just and equitable principles of trade.

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 is enhancing the 
Nasdaq Closing Cross to benefit members and investors, and does not 
believe that the proposed rule change would impose any significant 
burden on competition. Today, the Nasdaq Closing Cross provides a 
transparent auction process for executing member interest at the close. 
The proposed rule change is designed to allow additional interest to 
participate in the Nasdaq Closing Cross, and thereby provide a more 
efficient process for executing closing interest, and enhancing price 
discovery during

[[Page 35019]]

the close. The Exchange believes that proposed functionality will 
enhance the experience for members that trade in the Nasdaq Closing 
Cross and the various market participants that use the prices 
discovered by the cross, and is evidence of the strong competition in 
the equities industry, where exchanges must continually improve their 
offerings to stay competitive.

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 such 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-2017-061 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-2017-061. 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 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 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; 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 Number SR-NASDAQ-2017-061 and should 
be submitted on or before August 17, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
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    \26\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-15775 Filed 7-26-17; 8:45 am]
 BILLING CODE 8011-01-P