Document ID: SEC-2022-0014-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2022-01-05T05:00Z

[Federal Register Volume 87, Number 3 (Wednesday, January 5, 2022)]
[Notices]
[Pages 501-504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28519]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93876; File No. SR-NASDAQ-2021-101]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 4754 Related to 
Certain Order Handling in the LULD Closing Cross

December 29, 2021.
    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 December 22, 2021, 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 a proposal to amend its rule related to 
certain order handling in the Limit-Up Limit-Down (``LULD'') closing 
cross.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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 Equity 4, Rule 
4754 \3\ related to certain order handling in the LULD closing cross 
(``LULD Closing Cross'').\4\ On May 28, 2021, the Commission approved 
the Exchange's proposal to make certain changes to the Exchange's LULD 
Closing Cross, including the timing of the LULD Closing Cross, the 
process for determining the LULD Closing Cross price, establishing 
price protections for the LULD Closing Cross, the handling of on-close 
orders, and the imbalance information disseminated for the LULD Closing 
Cross.\5\ The Exchange has not yet implemented the proposed LULD 
Closing Cross changes in SR-NASDAQ-2021-009, and recently filed to 
delay implementation in order to allow the Exchange additional time to 
test and implement these functionalities.\6\
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    \3\ All Rule 4000 series referenced in this filing are within 
Equity 4.
    \4\ The LULD Closing Cross is the Exchange's auction process for 
executing closing trades in Nasdaq-listed securities when a Trading 
Pause pursuant to Rule 4120(a)(12) exists at or after 3:50 p.m. and 
before 4:00 p.m. ET. See Rule 4754(b)(6).
    \5\ See Securities Exchange Act Release No. 92068 (May 28, 
2021), 86 FR 29864 (June 3, 2021) (SR-NASDAQ-2021-009) (``Approval 
Order'').
    \6\ See Securities Exchange Act Release No. 93250 (October 4, 
2021), 86 FR 56307 (October 8, 2021) (SR-NASDAQ-2021-077).
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    During the testing conducted to date, Nasdaq has identified some 
changes that it wishes to make to the approved rule governing the LULD 
Closing Cross in Rule 4754(b)(6). Accordingly, the Exchange is 
submitting this proposal to

[[Page 502]]

amend the rule text prior to implementation. Specifically, the Exchange 
is proposing to provide that in the context of the LULD Closing Cross, 
Limit on Close (``LOC'') orders \7\ entered between 3:55 p.m. ET and 
immediately prior to 3:58 p.m. ET (``late LOC orders'') will use the 
same reference prices for re-pricing as the reference prices used 
during the standard Nasdaq Closing Cross.\8\
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    \7\ 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).
    \8\ ``Nasdaq Closing Cross'' shall mean the process for 
determining the price at which orders shall be executed at the close 
and for executing those orders. See Rule 4754(a)(6).
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    Today, Rule 4702(b)(12) describes the treatment of late LOC orders 
during the standard Closing Cross. The Rule provides that late LOC 
orders may be entered between 3:55 p.m. ET and immediately prior to 
3:58 p.m. ET provided that there is a First Reference Price \9\ (i.e., 
the Current Reference Price \10\ disseminated at 3:50 p.m. ET) or a 
Second Reference Price \11\ (i.e., the Current Reference Price 
disseminated at 3:55 p.m. ET). Between 3:55 p.m. ET and immediately 
prior to 3:58 p.m. ET, LOC Orders can only be cancelled and/or modified 
if the Participant requests that Nasdaq correct a legitimate error in 
the Order (e.g., Side, Size, Symbol, or Price, or duplication of an 
Order). LOC Orders cannot be cancelled or modified at or after 3:58 
p.m.
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    \9\ ``First Reference Price'' shall mean the Current Reference 
Price in the Early Order Imbalance Indicator (``EOII'') disseminated 
at 3:50 p.m. ET, or 10 minutes prior to the early closing time on a 
day when Nasdaq closes early. See Rule 4754(a)(9).
    \10\ ``Current Reference Price'' means the following: (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) it 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; or (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).
    \11\ ``Second Reference Price'' shall mean the Current Reference 
Price in the Order Imbalance Indicator (``NOII'') disseminated at 
3:55 p.m. ET, or five minutes prior to the early closing time on a 
day when Nasdaq closes early. See Rule 4754(a)(11).
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    A late LOC order will be accepted at its limit price, unless its 
limit price is higher (lower) than the higher (lower) of the First 
Reference Price and the Second Reference Price for a late LOC order to 
buy (sell), in which case the late LOC order will be handled consistent 
with the Participant's instruction that the late LOC order is to be: 
(1) Rejected; or (2) re-priced to the higher (lower) of the First 
Reference Price and the Second Reference Price.\12\
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    \12\ Furthermore, if either the First Reference Price or the 
Second Reference Price is not at a permissible minimum increment, 
the First Reference Price or the Second Reference Price, as 
applicable, 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. The default configuration for 
Participants that do not specify otherwise will be to have such late 
LOC orders re-priced rather than rejected. See Rule 4702(b)(12).
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    As stated in SR-NASDAQ-2021-009, the intent of the proposed rule 
change was to align the LULD Closing Cross process as closely as 
possible to the standard Closing Cross process, including the handling 
of various closing cross order types like LOC orders (and their subset, 
late LOC orders). As such, the Exchange amended Rule 4754(b)(6)(F)(ii) 
to provide that MOC, LOC, and IO orders may be entered, modified, and 
cancelled pursuant to Rules 4702(b)(11), 4702(b)(12), and 4702(b)(13) 
to allow these order types to participate in the LULD Closing Cross in 
the same way as a standard Closing Cross. This includes accepting late 
LOC orders during the LULD Closing Cross and re-pricing (in certain 
cases) these orders to the more aggressive of First Reference Price or 
Second Reference Price in the same way as a standard Closing Cross.
    In the context of the standard Closing Cross, the First Reference 
Price and the Second Reference Price, at the time of their 
dissemination at 3:50 p.m. ET and 3:55 p.m. ET, respectively, each 
represent the current price, bounded by the continuous market (i.e., 
the Nasdaq best bid and offer), at which paired on-close shares are 
maximized (with certain tie-breakers if multiple prices meet this 
criterion).\13\ SR-NASDAQ-2021-009, however, defined the 3:50 p.m. ET 
reference price and 3:55 p.m. ET reference price in the context of the 
LULD Closing Cross as the price at which the LULD Closing Cross would 
execute should the cross conclude at that time, and further indicated 
that the reference price would be bounded by the benchmark prices.\14\ 
As described in SR-NASDAQ-2021-009, the benchmark prices represent the 
price range within which the LULD Closing Cross price must fall and are 
calculated off the last disseminated LULD Auction Collar or the LULD 
Band that triggered the Trading Pause, as further described in Rule 
4754(b)(6)(E). As a result of the foregoing, in cases where a Trading 
Pause exists at or prior to 3:50 p.m. ET, the 3:50 and 3:55 p.m. ET 
reference prices in the LULD Closing Cross would not be bounded by 
continuous market (i.e., the Nasdaq best bid and offer) like the 3:50 
and 3:55 p.m. ET reference prices in the standard Closing Cross as 
there was no continuous market in the halted security during those 
times, and those reference prices in the LULD Closing Cross would 
instead be bounded by the benchmark prices described above. Similarly, 
if a Trading Pause is triggered after 3:50 p.m. ET but before 3:55 p.m. 
ET, the 3:50 reference price would reflect and be bounded by the Nasdaq 
best bid and offer at the time of dissemination like the 3:50 reference 
price used in a standard Closing Cross whereas the 3:55 reference price 
would not. Lastly, if a Trading Pause is triggered after 3:55 p.m. ET, 
both the 3:50 and 3:55 reference prices would reflect and be bounded by 
the Nasdaq best bid and offer at the time of dissemination like the 
reference prices used in a standard Closing Cross. The consequence of 
using the LULD Closing Cross-derived reference price and not the 
standard Closing Cross-derived reference price may result in late LOC 
orders being accepted and potentially repriced to 3:50 or 3:55 p.m. ET 
reference prices that are not reflective of the continuous market at 
the time of their dissemination (i.e., reference prices disseminated at 
a time when trading has been paused and that are not bounded by the 
Nasdaq best bid and offer), and which are bounded by benchmark prices 
that are calculated off the last disseminated LULD Auction Collar or 
the LULD Band that triggered the Trading Pause. The Exchange believes 
that this is inconsistent with market participant expectations of how 
late LOC orders would be normally repriced during a closing cross 
process (i.e., repriced to reference prices disseminated at a time when 
trading has been paused and that are not bounded by the Nasdaq best bid 
and offer), and therefore proposes to amend late LOC order handling so 
that its LULD Closing Cross and standard Closing Cross processes are 
more consistent.
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    \13\ See definition of Current Reference Price in Rule 
4754(a)(7)(A).
    \14\ See Approval Order at 29866.
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    Accordingly, the Exchange proposes to state in its rules that it 
will only accept and if needed, re-price a late LOC order in the LULD 
Closing Cross if a standard Closing Cross-derived reference price 
(i.e., First Reference Price or Second Reference Price) is available. 
In particular, the Exchange proposes to add the following language at 
the end of Rule 4754(b)(6)(F)(ii):

[[Page 503]]

    With respect to LOC orders entered between 3:55 p.m. ET and 
immediately prior to 3:58 p.m. ET (hereinafter, ``late LOC orders''), 
the System will handle such orders in the LULD Closing Cross as 
follows:
    (a) If the security entered a Trading Pause prior and up to 3:50 
p.m., the System will not accept late LOC orders.\15\
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    \15\ The System will not accept late LOC orders in this scenario 
because if a security entered a Trading Pause prior and up to 3:50 
p.m. ET, there would not be a First Reference Price or a Second 
Reference Price for the standard Closing Cross.
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    (b) If the security entered a Trading Pause after 3:50 p.m. and up 
to 3:55 p.m., the System will accept late LOC orders, provided that 
there is a First Reference Price. Such orders may then be subject to 
re-pricing in accordance with Rule 4702(b)(12) or rejected, in either 
case consistent with the Participant's instructions.\16\
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    \16\ The System will accept late LOC orders provided there is a 
First Reference Price because in this scenario, the security entered 
a Trading Pause after 3:50 p.m. ET (but before 3:55 p.m. ET) so the 
First Reference Price would be disseminated at 3:50 p.m. ET for the 
standard Closing Cross but the Second Reference Price for the 
standard Closing Cross would not be disseminated at 3:55 p.m. ET. 
The option to have the Participant's aggressively priced late LOC 
order rejected instead of re-priced is consistent with the standard 
Closing Cross. See Rule 4702(b)(12).
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    (c) If the security entered a Trading Pause after 3:55 p.m., the 
System will accept late LOC orders, provided that there is a First 
Reference Price or a Second Reference Price. Such orders may then be 
subject to re-pricing in accordance with Rule 4702(b)(12) or rejected, 
in either case consistent with the Participant's instructions.\17\
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    \17\ The System will accept late LOC orders provided there is a 
First Reference Price or Second Reference Price because in this 
scenario, the security entered a Trading Pause after 3:55 p.m. ET so 
both the First Reference Price and the Second Reference Price would 
be disseminated for the standard Closing Cross.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\19\ 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 because it would amend the LULD Closing Cross process with 
respect to certain LOC order handling as approved in SR-NASDAQ-2021-009 
in order to further align the LULD Closing Cross with the standard 
Nasdaq Closing Cross. Specifically, the Exchange is proposing to 
provide in Rule 4754(b)(6)(F)(ii) that it will only accept and if 
needed, re-price a late LOC order in the LULD Closing Cross if a First 
Reference Price or Second Reference Price for the standard Closing 
Cross is available, identical to the handling of late LOC orders for 
the standard Closing Cross. As discussed above, in the context of the 
standard Closing Cross, the First Reference Price and the Second 
Reference Price, at the time of their dissemination at 3:50 p.m. ET and 
3:55 p.m. ET, respectively, each represent the current price, bounded 
by the continuous market (i.e., the Nasdaq best and offer), at which 
paired on-close shares are maximized. SR-NASDAQ-2021-009, however, 
defined the 3:50 p.m. ET reference price and 3:55 p.m. ET reference 
price in the context of the LULD Closing Cross as the price, bounded by 
the benchmark prices, at which the LULD Closing Cross would execute 
should the cross conclude at that time. Because the benchmark prices 
are based on the LULD Auction Collar or LULD Band instead of the 
continuous market, the consequence of using the LULD Closing Cross-
derived reference price and not the standard Closing Cross-derived 
reference price may result in late LOC orders being accepted and 
potentially repriced to 3:50 or 3:55 reference prices that are not 
reflective of the continuous market at the time of their dissemination 
(i.e., reference prices disseminated at a time when trading has been 
paused and that are not bounded by the Nasdaq best bid and offer), and 
which are bounded by benchmark prices that are calculated off the last 
disseminated LULD Auction Collar or the LULD Band that triggered the 
Trading Pause. The Exchange believes that this is an undesirable 
outcome and contrary to market participant expectations of how a late 
LOC order would normally be repriced by the Exchange. The Exchange 
believes that the proposed changes will align the LULD Closing Cross 
with the standard Closing Cross more closely, thereby promoting a more 
consistent experience for market participants, and reducing any 
potential confusion regarding Nasdaq's closing processes.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 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 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Rather, the proposed changes 
would allow the Exchange to make certain changes to the Exchange's 
rules and functionality related to certain LOC order handling in the 
LULD Closing Cross in a manner consistent with the current standard 
Closing Cross. Ultimately, the Exchange believes that the proposed 
changes will render the LULD Closing Cross more attractive to market 
participants by providing a more consistent experience for Nasdaq's 
closing processes.

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 the 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 [email protected]. Please include 
File Number SR-NASDAQ-2021-101 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-2021-101. 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

[[Page 504]]

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 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-2021-101 and should be submitted on or before January 26, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021-28519 Filed 1-4-22; 8:45 am]
BILLING CODE 8011-01-P