Document ID: SEC-2019-0648-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2019-05-14T04:00Z

[Federal Register Volume 84, Number 93 (Tuesday, May 14, 2019)]
[Notices]
[Pages 21384-21387]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09871]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85806; File No. SR-NASDAQ-2019-035]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Remove the Exchange's Current Primary Contingency Procedure From the 
Exchange's Rule Book

May 8, 2019.
    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 April 26, 2019, 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.
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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 remove the Exchange's current Primary 
Contingency Procedure from the Exchange's rule book and designate the 
Exchange's current Secondary Contingency Procedure as the default 
contingency procedure when a disruption occurs that prevents the 
execution of the closing cross for a security.
    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
    Nasdaq currently has two contingency plans for determining the 
Nasdaq Official Closing Price (``NOCP'') for a security in the event 
that Nasdaq experiences a system disruption that precludes normal 
execution of the Nasdaq closing cross pursuant to Rule 4754. In the 
event of such disruption, the President of Nasdaq or any Senior 
Executive designated by the President will be authorized to invoke 
either the Primary Contingency Procedures set forth in Rule 4754(b)(7) 
or the Secondary Contingency Procedures set forth in Rule 4754(b)(8) to 
determine the NOCP, which would be published to the Consolidated Quote/
Consolidated Tape Plan (``SIPs''). Nasdaq will employ the Primary 
Contingency Procedures if at all possible, and it will employ the 
Secondary Contingency Procedures only if it determines that both the 
standard procedures and the Primary Contingency Procedures are 
unavailable.
    Under the Primary Contingency Procedures, Nasdaq will employ an 
offline process using stored order files to determine the size and 
component executions for the closing cross trade in any and all 
affected securities on a security-by-security basis and manually 
deliver execution reports to members.\3\ Currently, Nasdaq maintains a 
database of all closing cross orders entered into

[[Page 21385]]

its execution system, as well as other data regarding order processing. 
The database is independent of and isolated from the execution system 
and network and, as a result, it can operate regardless of impairment 
to those systems. Nasdaq will operate the Primary Contingency 
Procedures from a server that is also independent of and isolated from 
the execution system and network, and that is supported by multiple 
redundant backups.
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    \3\ Currently, under Rule 4754(b)(7), when a disruption occurs 
that prevents the execution of the closing cross for any security, 
Nasdaq will identify the last regular way trade reported by the 
network processor prior to 4:00 p.m. and will publish that price as 
the NOCP. In the event an impacted security has no consolidated 
trading in that security for that day, Nasdaq will have no NOCP and 
no contingency cross for that security. Once Nasdaq has identified 
the NOCP for a given security, Nasdaq will operate a modified 
closing cross to determine the number of shares and the specific 
orders that can be executed at the NOCP. All Market-on-Close 
(``MOC'') orders entered prior to 3:55 p.m., Limit-on-Close 
(``LOC'') orders entered prior to 3:58 p.m., and Imbalance Only 
orders entered prior to 4:00 p.m. will be eligible to participate in 
the Contingency Closing Cross. Nasdaq will cross and execute 
eligible MOC and LOC orders in price-time priority. If an order 
imbalance exists in the MOC and LOC interest that is marketable at 
the NOCP, Nasdaq will include in the cross Imbalance Only orders on 
the side of the market with less trading interest in price/time 
priority, and then execute all MOC, LOC and Imbalance Only orders at 
the NOCP. Once Nasdaq has completed the Contingency Closing Cross, 
it will report the results to the appropriate network processor and 
deliver execution reports to members. After hours trading will begin 
either as scheduled at 4:00 p.m. or upon resolution of the 
disruption that triggered Nasdaq to operate the Contingency Closing 
Cross.
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    In the event that Nasdaq's market is impaired and unable to execute 
a closing auction for all or a subset of listed securities under the 
standard closing procedures and the Primary Contingency Procedures are 
unavailable, and Nasdaq determines to follow the Secondary Contingency 
Procedures at or before 3 p.m. EST, Nasdaq will designate a back-up 
exchange.\4\ Currently, Nasdaq has designated NYSE Arca as its official 
back-up exchange.\5\ If Nasdaq determines to follow the Secondary 
Contingency Procedures after 3 p.m., the Exchange would calculate the 
NOCP with a volume-weighted average price (``VWAP'') calculation.\6\ 
Nasdaq would invoke the Secondary Contingency Procedures only after it 
determines that neither the standard closing procedures nor the Primary 
Contingency Procedures are available. Nasdaq is proposing to eliminate 
the Primary Contingency Procedures so that the Secondary Contingency 
Procedures will be the default contingency procedures.
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    \4\ Currently, under Rule 4754(b)(8)(A), if Nasdaq determines to 
invoke the Secondary Contingency Procedures at or prior to 3:00 p.m. 
EST, the official closing price from Nasdaq's designated alternate 
exchange would serve as the NOCP or, if there is no official closing 
price on the designated alternate exchange, the NOCP would be the 
VWAP of the consolidated last-sale eligible prices for the last five 
minutes of trading during regular trading hours. If there were no 
consolidated last-sale eligible trades in the last five minutes of 
trading during regular trading hours, the NOCP would be the last 
consolidated last-sale eligible trade for such security during 
regular trading hours on that day or, if there was no last-sale 
eligible trade, the prior day's NOCP. If no NOCP can be calculated 
by any of the foregoing methods, the Exchange would not publish an 
official closing price for the security.
    \5\ See Securities Exchange Act Release No. 78014 (June 8, 
2016), 81 FR 38755 (June 14, 2016) (SR-NASDAQ-2016-035) (``Notice of 
Filing of Amendment No. 1, and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Establish Secondary Contingency Procedures for the Exchange's 
Closing Cross'').
    \6\ Currently, under Rule 4754(b)(8)(B), if Nasdaq determines to 
invoke the Secondary Contingency Procedures after 3:00 p.m. EST, the 
VWAP of the consolidated last-sale eligible prices for the last five 
minutes of trading during regular trading hours would serve as the 
NOCP. If there were no consolidated last-sale eligible trades in the 
last five minutes of trading during regular trading hours, the NOCP 
would be the last consolidated last-sale eligible trade for such 
security during regular trading hours on that day or, if there was 
no last-sale eligible trade, the prior day's NOCP. If no NOCP can be 
calculated by any of the foregoing methods, the Exchange would not 
publish an official closing price for the security.
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    Since June of 2002, Nasdaq has published contingency plans in the 
event the Nasdaq closing process was to be disrupted during the annual 
Russell US Index Reconstitution (``Russell Rebalance''). Nasdaq adopted 
the current Primary Contingency Procedures in 2013 in order to formally 
include the Exchange's contingency plans in its rule manual.\7\ In 
response to evolving technology and industry practice, Nasdaq adopted 
the Secondary Contingency Procedures in 2016.\8\ In conjunction with or 
shortly after Nasdaq's adoption of the Secondary Contingency 
procedures, NYSE,\9\ NYSE American,\10\ NYSE Arca,\11\ and Cboe BZX 
Exchange, Inc. (``Cboe BZX'') \12\ established contingency procedures 
materially similar to Nasdaq's Secondary Contingency Procedures.\13\ 
However, no other national securities exchange has established 
contingency procedures similar to Nasdaq's Primary Contingency 
Procedures.\14\ Further, the Primary Contingency Procedures have never 
been invoked by the Exchange. Nasdaq is proposing to eliminate the 
Primary Contingency Procedures so that the Secondary Contingency 
Procedures will be the default contingency procedure.
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    \7\ See Securities Exchange Act Release No. 69880 (June 27, 
2013), 78 FR 40223 (July 3, 2013) (SR-NASDAQ-2013-090) (``Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to 
Amend Exchange Rule 4754 Governing the NASDAQ Closing Cross 
(``Cross'')'').
    \8\ See supra, note 5.
    \9\ See Securities Exchange Act Release No. 78015 (June 8, 
2016), 81 FR 38747 (June 14, 2016) (SR-NYSE-2016-18) (``Notice of 
Filings of Amendment No. 1, and Order Granting Accelerated Approval 
of Proposed Rule Changes, as Modified by Amendment No. 1, To Provide 
for How the Exchanges Would Determine an Official Closing Price if 
the Exchanges Are Unable To Conduct a Closing Transaction'').
    \10\ See Securities Exchange Act Release No. 78015 (June 8, 
2016), 81 FR 38747 (June 14, 2016) (SR-NYSEMKT-2016-31) (``Notice of 
Filings of Amendment No. 1, and Order Granting Accelerated Approval 
of Proposed Rule Changes, as Modified by Amendment No. 1, To Provide 
for How the Exchanges Would Determine an Official Closing Price if 
the Exchanges Are Unable To Conduct a Closing Transaction'').
    \11\ See Securities Exchange Act Release No. 78357 (July 19, 
2016), 81 FR 48477 (July 25, 2016) (SR-NYSEArca-2016-94) (``Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending NYSE Arca Equities Rule 1.1 to Establish an Official 
Closing Price for Exchange-Listed Securities if the Exchange is 
Unable to Conduct a Closing Auction'').
    \12\ See Securities Exchange Act Release No. 78527 (August 10, 
2016), 81 FR 54628 (August 16, 2016) (SR-BatsBZX-2016-47) (``Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Establish a Closing Contingency Procedure'').
    \13\ Investors Exchange LLC (``IEX'') has also adopted Secondary 
Closing Auction Contingency Procedures under Rule 11.350(d)(4)(B) 
that are similar to Nasdaq's Secondary Contingency Procedures.
    \14\ IEX has adopted Primary Closing Auction Contingency 
Procedures under Rule 11.350(d)(4)(A)(i). If IEX determines to 
initiate the Primary Closing Auction Contingency Procedures, IEX 
will publicly announce that no Closing Auction will occur. The price 
of the Final Consolidated Last Sale Eligible Trade will be used for 
the IEX Official Closing Price. The IEX Official Closing Price will 
be published to the Consolidated Tape. IEX will execute orders on 
the Closing Auction Book at the IEX Official Closing Price to the 
extent executable buy and sell interest exists on the Closing 
Auction Book. All remaining orders on the Order Book will be 
canceled at the conclusion of the contingency process. IEX will 
report the resulting execution to the Consolidated Tape and deliver 
execution reports to Users. If a security's IEX Official Closing 
Price cannot be determined by this subsection, IEX will not publish 
an IEX Official Closing Price for the security and will cancel all 
orders on the Order Book. The Post Market Session shall begin either 
as scheduled, or upon resolution of the disruption that triggered 
IEX to operate the Primary Contingency Procedures. In contrast, if 
Nasdaq determines to initiate the Primary Contingency Procedures, 
Nasdaq will identify the last consolidated regular way trade 
reported by the network processor prior to 4:00 p.m. and shall 
publish that price as the Nasdaq Official Closing Price for that 
security. Once Nasdaq has identified the NOCP for a given security, 
Nasdaq will operate a modified closing cross to determine the number 
of shares and the specific orders that can be executed at the NOCP. 
See supra, note 3.
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    Nasdaq believes that removing the Primary Contingency Procedures 
and utilizing the Secondary Contingency Procedures in the event Nasdaq 
is unable to execute a closing cross would harmonize the Exchange's 
contingency procedures with those of other national securities 
exchanges, which would provide market participants with consistency and 
predictability in the event that an exchange is impaired and cannot 
conduct a closing auction. Furthermore, Nasdaq believes that the 
Secondary Contingency Procedures best preserves Nasdaq's ability to 
move quickly to establish a reliable closing price under unusual 
conditions, as compared to the Primary Contingency Procedures, which 
utilize an offline process that requires Nasdaq to determine the size 
and component executions for the closing cross on a security-by-
security basis using stored order files and manually deliver execution 
reports to members. The Exchange believes that having robust, efficient 
contingency procedures is particularly important on high volume trading 
days, such as the Russell Rebalance, which occurs annually in June.\15\
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    \15\ See FTSE Russell, ``Russell US Index Reconstitution'', 
available at: https://www.ftserussell.com/index-series/index-resources/russell-reconstitution.
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    In addition, Nasdaq proposes to delete text in Rule 4754(b)(7) 
describing the

[[Page 21386]]

information that the Exchange will use when determining whether to 
employ the Primary or Secondary Contingency Procedures because the 
Secondary Contingency Procedures will be the default contingency 
procedure under the proposed rule change. The Exchange also proposes to 
add ``VWAP'' as a defined term that was inadvertently omitted in the 
previous version of Rule 4754(b)(8)(A)(ii); update Rule 
4754(b)(8)(B)(i) to include the new defined term ``VWAP''; and add an 
``or'' that was inadvertently omitted in the previous version of Rule 
4754(b)(8)(B)(ii) and Rule 4754(b)(8)(B)(iii). Lastly, the Exchange 
proposes renumbering the current Rule 4754(b)(8) as Rule 4754(b)(7) to 
maintain a clear and organized rule structure.
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. The proposal is consistent with this provision of the Act in 
that it will ensure that the Exchange continues to operate a fair and 
orderly market and to provide for an effective pricing mechanism for 
the critical period of the market close in the event of a disruption 
where Nasdaq is unable to execute a closing cross in a way that is 
consistent with the contingency procedures utilized by other national 
securities exchanges, which helps ensure transparency, consistency and 
predictability for market participants. The Exchange believes that 
having robust contingency procedures is particularly important on high 
volume trading days, such as the Russell Rebalance, which occurs 
annually in June.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    With respect to the Exchange's proposals to delete text in Rule 
4754(b)(7) describing the information that the Exchange will use when 
determining whether to employ the Primary or Secondary Contingency 
Procedures; add ``VWAP'' as a defined term that was inadvertently 
omitted in the previous version of Rule 4754(b)(8)(A)(ii); update Rule 
4754(b)(8)(B)(i) to include the new defined term ``VWAP''; and add an 
``or'' that was inadvertently omitted in the previous version of Rule 
4754(b)(8)(B)(ii) and Rule 4754(b)(8)(B)(iii), the Exchange believes 
that these changes are consistent with the Act because they will 
improve the readability and clarity of the Rule. These changes are not 
substantive. Lastly, the Exchange believes that its proposal to 
renumber the current Rule 4754(b)(8) as Rule 4754(b)(7) is consistent 
with the Act because it will allow the Exchange to maintain a clear and 
organized rule structure and prevent investor confusion.

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 proposed rule change is not 
designed to address any competitive issues, but rather to provide for 
how the Exchange would determine the NOCP for Exchange-listed 
securities in the event that Nasdaq experiences a system disruption 
that precludes normal execution of the Nasdaq closing cross. This is 
designed to reduce the burden on competition by having similar back-up 
procedures across other primary listing exchanges \18\ if such exchange 
is impaired and cannot conduct a closing auction. This proposal will 
maintain the Secondary Contingency Procedures, which were crafted with 
input from industry participants, the Exchange, and the SIPs, and 
remove the Primary Contingency Procedures, which are inconsistent with 
industry practices.
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    \18\ NYSE, NYSE American, NYSE Arca and Cboe BZX have 
established contingency procedures materially similar to Nasdaq's 
Secondary Contingency Procedures and do not have primary contingency 
procedures. IEX has established a secondary contingency procedure 
similar to Nasdaq's and a primary contingency procedure that differs 
from Nasdaq's. See supra, notes 9 to 14.
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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

    Because the foregoing 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 for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its 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.
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    At any time within 60 days of the filing of the 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 to 
determine whether the proposed rule change should be approved or 
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-2019-035 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-2019-035. 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

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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 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-2019-035 and should be submitted on or before June 4, 2019.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-09871 Filed 5-13-19; 8:45 am]
 BILLING CODE 8011-01-P