Document ID: SEC-2012-0827-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-05-24T04:00Z

[Federal Register Volume 77, Number 101 (Thursday, May 24, 2012)]
[Notices]
[Pages 31055-31057]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12646]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67024; File No. SR-NASDAQ-2012-060]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Rule 4751(f)(7) Concerning the Processing of the Price To Comply Order

May 18, 2012.
    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 May 8, 2012, 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, II 
and III 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 clarify how the processing of a Price to 
Comply Order under Rule 4751(f)(7) operates based on the method of 
entry. The Exchange will implement the change effective May 14, 2012.
    The text of the proposed rule change is below. Proposed new 
language is italics; proposed deletions are in brackets.
* * * * *

4751. Definitions

    The following definitions apply to the Rule 4600 and 4750 Series 
for the trading of securities listed on Nasdaq or a national securities 
exchange other than Nasdaq.
    (a)-(e)
    (f) The term ``Order Type'' shall mean the unique processing 
prescribed for designated orders that are eligible for entry into the 
System, and shall include:
    (1)-(6) No change.
    (7) ``Price to Comply Order'' are orders that, if, at the time of 
entry, a Price to Comply Order would lock or cross the quotation of an 
external market, the order will be priced to the current low offer (for 
bids) or to the current best bid (for offers) and displayed at a price 
one minimum price increment lower than the offer (for bids) or higher 
than the bid (for offers). The displayed and undisplayed prices of a 
Price to Comply order entered through an OUCH port may be adjusted once 
or multiple times depending upon [the method of order entry and]the 
election of the member firm and changes to the prevailing NBBO. The 
displayed and undisplayed prices of a Price to Comply order entered 
through a RASH port may be adjusted multiple times, depending upon 
changes to the prevailing NBBO.
    (8)-(14) No change.
    (g)-(i) No change.
* * * * *

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 is proposing to clarify the effect that the methods of order 
entry have on the processing of a Price to Comply Order, as described 
in Rule

[[Page 31056]]

4751(f)(7).\3\ A Price to Comply Order allows a member firm to quote 
aggressively and still comply with the locked and crossed markets 
provisions of Regulation NMS.\4\ Prior to June 2008, if at the time of 
entry a Price to Comply Order would create a violation of SEC Rule 
610(d) by locking or crossing the protected quote of an external market 
or would cause a violation of SEC Rule 611 by trading through such a 
protected quote, the order was converted by the NASDAQ system to a Non-
Displayed Order, as defined in Rule 4751(e)(3),\5\ and re-priced to the 
current low offer (for bids) or to the current best bid (for offers). 
Thereafter, such a Non-Displayed Order would be cancelled by the NASDAQ 
system if the market moved through the price of the order after the 
order was accepted.
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    \3\ ``Price to Comply Order'' is an order such that, if, at the 
time of entry, it would lock or cross the quotation of an external 
market, the order will be priced to the current low offer (for bids) 
or to the current best bid (for offers) and displayed at a price one 
minimum price increment lower than the offer (for bids) or higher 
than the bid (for offers).
    \4\ 17 CFR 242.610.
    \5\ ``Non-Displayed Order'' is a limit order that is not 
displayed in the NASDAQ system, but nevertheless remains available 
for potential execution against all incoming orders until executed 
in full or cancelled.
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    In June 2008, NASDAQ amended Rule 4751(f)(7).\6\ The amendment 
changed how the Price to Comply Order operates so that a locking or 
crossing order is no longer converted to a Non-Displayed Order, but 
rather is displayed at the most aggressive price possible, one minimum 
price increment worse than the locking price. NASDAQ also added 
language to the rule, which noted that the Exchange may adjust the 
displayed and undisplayed prices of a Price to Comply Order once or 
multiple times, depending on the method of order entry and changes to 
the National Best Bid and Offer (``NBBO''). In the discussion of the 
rule change, NASDAQ explained that the displayed and undisplayed price 
of an individual order may be modified one or more times depending upon 
the manner of order entry into the system. In particular, if a member 
chooses to enter a Price to Comply Order via NASDAQ's RASH protocol, 
the order is priced upon entry and may be adjusted multiple times in 
response to changes in the prevailing NBBO to move the displayed price 
closer to the original entered price and display the best possible 
price consistent with the provisions of Regulation NMS. In addition, 
each time the displayed price is adjusted, the order will receive a new 
timestamp for purposes of determining its price/time priority according 
to NASDAQ's existing processing rules. If a Price to Comply Order is 
entered via NASDAQ's OUCH protocol, however, the order will be repriced 
only upon entry and the order is not repriced in the event the 
prevailing NBBO changes.
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    \6\ Securities Exchange Act Release No. 57910 (June 3, 2008), 73 
FR 32776 (June 10, 2008) (SR-NASDAQ-2008-049).
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    NASDAQ is proposing to amend Rule 4751(f)(7) to clarify the effect 
that the method of order entry has on the processing of the Price to 
Comply Order. As noted above, the method of entry of a Price to Comply 
Order determines whether the order is repriced once or multiple times. 
This will continue to be the case under the amended rule; however, an 
OUCH subscriber will be afforded the choice to have its Price to Comply 
Order be subject to repricing either only once or multiple times. 
Member firms will designate each OUCH protocol order port to use either 
the single or multiple repricing functionality for any Price to Comply 
Order entered via that port.\7\ A RASH subscriber will continue to have 
the Price to Comply Order repriced multiple times, when appropriate. 
The methodology for repricing the Price to Comply Order will not vary 
based on how the order is entered. Like a RASH-entered Price to Comply 
Order, each time the OUCH-entered order is repriced it will receive a 
new timestamp for purposes of determining its price/time priority. As 
such, a repriced Price to Comply Order is treated as a new order in 
terms of priority and, as such, there is no guarantee that the OUCH-
entered Price to Comply Order will receive priority when it becomes 
actionable after repricing.
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    \7\ In the absence of designation from a member firm, NASDAQ 
will default the member's OUCH port(s) to single repricing.
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    NASDAQ believes that the new functionality and related rule change 
will serve to reduce the order traffic received using the OUCH 
protocol. NASDAQ notes that, in certain cases, a member will submit a 
Price to Comply Order at an aggressive price that it anticipates will 
be at the NBBO. Often such an order is not submitted at the NBBO and is 
not executed after repricing because the market does not move to the 
adjusted order price. In such cases, the member firm will typically 
submit additional aggressive orders, which likewise are not executed. 
Because the OUCH protocol is used by member firms that are able to 
submit a large volume of orders, NASDAQ believes that offering such 
firms the ability to have NASDAQ reprice a Price to Comply Order 
multiple times will serve to reduce the excessive volume of orders 
entered into the System and ultimately canceled.
    As noted, NASDAQ will continue to offer OUCH subscribers an 
alternative to the multiple repricing functionality so that such member 
firms may elect to have a locked or crossed Price to Comply Order 
repriced only once, consistent with the current process. NASDAQ 
believes that this will accommodate member firms that seek the 
certainty of repricing at most once or whose trading systems depend on 
the existing repricing mechanism.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\8\ in general, and with Section 
6(b)(5) of the Act \9\ in particular, in that the proposal 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 regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. NASDAQ believes this 
proposal is consistent with the Exchange Act and, specifically, Rules 
610 and 611of Regulation NMS in that it is designed to prevent orders 
from locking and crossing market or trading through protected quotes, 
while also promoting a more efficient market. In this regard, NASDAQ 
believes that the proposed rule change will promote the efficient use 
of the Exchange by reducing the number of orders entered into the 
market and ultimately canceled. The proposed rule change will 
accomplish this by providing the member firms that tend to enter the 
greatest number of such orders an option to have the Exchange reprice a 
single order multiple times. NASDAQ also believes that permitting a 
high volume user the option to continue to have the Exchange reprice 
its Price to Comply Order only upon order entry, when appropriate, will 
ensure member firms with internal systems that act in reliance of this 
function will continue to operate without disruption.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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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

[[Page 31057]]

necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor 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)(ii) of the Act \10\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(6).
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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. The Exchange has 
provided 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.

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-2012-060 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 Number SR-NASDAQ-2012-060. 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 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2012-060 and should 
be submitted on or before June 14, 2012.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12646 Filed 5-23-12; 8:45 am]
BILLING CODE 8011-01-P