Document ID: SEC-2016-1920-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2016-11-01T04:00Z

[Federal Register Volume 81, Number 211 (Tuesday, November 1, 2016)]
[Notices]
[Pages 75862-75865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26301]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79163; File No. SR-NASDAQ-2016-141]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rule 4702 To Adopt a 
New Retail Post-Only Order

October 26, 2016.
    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 October 13, 2016, 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) [sic] adopt 
a New Retail Post-Only Order. 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.

[[Page 75863]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to amend Rule 4702 (Order Types) to 
adopt a new Retail Post-Only Order type. Although based on the Post-
Only Order, the Retail Post-Only Order differs from the Post-Only Order 
in two ways. First, the Retail Post-Only Order can only be used in 
connection with orders sent on behalf of retail customers, whereas a 
Post-Only Order is available for use by any market participant. Second, 
if a Retail Post Only Order would remove liquidity or if posting the 
order would require an adjustment to the price of the order for any 
reason, the order will be cancelled. In contrast, a Post-Only Order is 
designed to have its price adjusted as needed, for example, in order to 
avoid locking or crossing a Protected Quotation. With the Retail Post-
Only Order, Nasdaq is providing firms with another way of managing 
their retail customer order flow. Currently, if a firm does not want a 
retail customer order to remove liquidity from the Exchange upon entry, 
the firm can select the RTFY routing option, which routes the order to 
destinations in the System routing table instead of immediately 
removing liquidity from the Exchange order book.\3\ Some firms, 
however, prefer to use their own routing infrastructure in seeking 
execution of a customer order rather than allowing that order to remove 
liquidity from the Exchange upon entry or instructing the Exchange to 
make a routing determination. In cancelling the order for any reason 
instead of adjusting its price, the Retail Post-Only Order will 
therefore provide firms with an alternative for handing [sic] retail 
customer orders.
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    \3\ See Nasdaq Rule 4738(a)(1)(A)(v)(b); see also Securities 
Exchange Act Release No. 76718 (December 21, 2015), 80 FR 80847 
(December 28, 2015) (SR-NASDAQ-2015-112).
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    As noted above, the first key feature of the Retail Post-Only Order 
is that it is designed for use by retail customers. Accordingly, a 
Retail Post-Only Order must meet the criteria of a Designated Retail 
Order, as defined in Rule 7018, in addition to the criteria set forth 
in Rule 4702(b)(14).\4\ Nasdaq believes that defining a retail customer 
by reference to Rule 7018 is appropriate because this definition is 
already used in connection with other Nasdaq programs and fees, 
including the RTFY routing option, and defining a retail customer by 
reference to Rule 7018 will therefore keep the concept of ``retail''--
either as applied to a type of order or to a type of customer--
consistent across the Exchange. Nasdaq is offering this Order to retail 
customers because it will provide firms that handle retail customer 
order flow with an alternative to the methods of handling retail order 
flow that currently exist on the Exchange.\5\ By offering firms that 
handle retail order flow an additional choice, Nasdaq believes that the 
proposal could stimulate competition by attracting additional retail 
customer order flow to the Exchange.
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    \4\ Rule 7018 provides that a Designated Retail Order is ``an 
agency or riskless principal order that meets the criteria of FINRA 
Rule 5320.03 and that originates from a natural person and is 
submitted to Nasdaq by a member that designates it pursuant to this 
rule, provided that no change is made to the terms of the order with 
respect to price or side of market and the order does not originate 
from a trading algorithm or any other computerized methodology. An 
order from a `natural person' can include orders on behalf of 
accounts that are held in a corporate legal form--such as an 
Individual Retirement Account, Corporation, or a Limited Liability 
Company--that has been established for the benefit of an individual 
or group of related family members, provided that the order is 
submitted by an individual. Members must submit a signed written 
attestation, in a form prescribed by Nasdaq, that they have 
implemented policies and procedures that are reasonably designed to 
ensure that substantially all orders designated by the member as 
`Designated Retail Orders' comply with these requirements. Orders 
may be designated on an order-by-order basis, or by designating all 
orders on a particular order entry port as Designated Retail 
Orders.''
    \5\ As noted above, there are various options a member may 
currently use to efficiently manage its order flow, such as 
utilizing the RTFY routing option or allowing that order to have its 
price adjusted and potentially remove liquidity.
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    The second key feature of the Retail Post-Only Order is that it 
will cancel if the price of the Order would otherwise adjust for any 
reason. Rule 4702(b)(14) therefore states that when a new Retail Post-
Only order is received, it will attempt to post on the Exchange Book. A 
Retail Post-Only order that cannot post to the Nasdaq Book at its limit 
price without having its price adjusted or removing liquidity will be 
cancelled.\6\
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    \6\ An order may have its price adjusted, for example, to 
satisfy a regulatory obligation, such as the prohibition under 
Regulation NMS against locking or crossing a Protected Quotation. 
See 17 CFR 242.610(d). Another scenario where the price of an order 
may have to be adjusted for purposes of regulatory compliance is 
Rule 201 of Regulation SHO, which requires trading centers to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the execution or display of a short 
sale order at a price at or below the current National Best Bid 
under certain circumstances. See 17 CFR 242.201.
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    The Retail Post-Only Order is based on the Post-Only Order, and 
will therefore share most of the attributes of a Post-Only Order.\7\ 
For example, a Retail Post-Only Order may be entered with reserve size. 
As with the Post-Only Order, a Retail Post-Only Order may be entered in 
any whole share size between one share and 999,999 shares. Orders for 
fractional shares are not permitted.
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    \7\ As defined in Rule 4703, the potential attributes that may 
apply to an order are (1) time-in-force; (2) size; (3) price; (4) 
pegging; (5) minimum quantity; (6) routing; (7) discretion; (8) 
reserve size; (9) attribution; (10) Intermarket Sweep Order; (11) 
display; and (12) participation in the Nasdaq Opening Cross or the 
Nasdaq Closing Cross.
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    With respect to Time-in-Force (the period of time that the Nasdaq 
Market Center will hold the Order for potential execution), the Retail 
Post-Only Order may be entered with all times permitted by Time-in-
Force;\8\ however, a Retail Post-Only Order that is entered as 
``Immediate or Cancel'' will be canceled (because an Immediate or 
Cancel order is incapable of posting to the Nasdaq Book).
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    \8\ Under Rule 4703(a), Participants specify an Order's Time-in-
Force by designating a time at which the Order will become active 
and a time at which the Order will cease to be active. The available 
times for activating Orders are (1) time of the Order's receipt by 
the Nasdaq Market Center; (2) the Nasdaq Opening Cross (or 9:30 a.m. 
ET in the case of a security for which no Nasdaq Opening Cross 
occurs); (3) Market Hours, beginning after the completion of the 
Nasdaq Opening Cross (or at 9:30 a.m. ET in the case of a security 
for which no Nasdaq Opening Cross occurs); (4) the Nasdaq Closing 
Cross (or the end of Market Hours in the case of a security for 
which no Nasdaq Closing Cross occurs); (5) 8:00 a.m. ET, in the case 
of an Order using the SCAN or RTFY routing strategy that is entered 
prior to 8:00 a.m. ET; (6) the beginning of the Display-Only Period, 
in the case of a security that is the subject of a trading halt and 
for which trading will resume pursuant to a halt cross; and (7) the 
resumption of trading, in the case of a security that is the subject 
of a trading halt and for which trading resumes without a halt 
cross.
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    Unlike the Post-Only Order, Retail Post-Only Orders cannot be 
designated as Intermarket Sweep Orders (``ISO''). The purpose of the 
Order is to allow firms to utilize their own routing infrastructure in 
deciding how to execute a retail customer order. Retail Post Only 
orders will therefore not route and have no routing strategies used in 
conjunction with the order, and will also not support the ISO 
attribute. Unlike the Post-Only Order, the Retail Post-Only Order will 
also not utilize the ``display'' attribute, since a Retail Post-Only 
Order may be either displayed or non-displayed.
    As with Post-Only Orders, Retail Post-Only Orders will support 
attribution, which permits a Participant to designate that the price 
and size of the Order will be displayed next to the Participant's MPID 
in market data disseminated by Nasdaq. A Retail Post-Only order may 
also participate in the Nasdaq Opening Cross and/or the Nasdaq Closing 
Cross.
    As with Post-Only Orders, Retail Post Only Orders will not support 
pegging (the attribute by which the price of the Order is automatically 
set with

[[Page 75864]]

reference to the National Best Bid or Offer), since the purpose of this 
Order is to cancel if the price of the Order needs to be adjusted. For 
the same reason, Retail Post Only Orders will also not support 
discretion (where an order has a non-displayed discretionary price 
range within which the entering Participant is willing to trade).
    The Retail Post-Only Order will be available for entry through 
Nasdaq's RASH, FIX and QIX order entry protocols. Nasdaq notes that 
almost all Designated Retail Orders received by the Exchange are 
entered through the RASH and FIX protocols. A user may also enter a 
Retail Post-Only Order during Pre-Market and Post-Market Hours.\9\ 
During these times, a Retail Post-Only Order will be processed in a 
manner identical to Market Hours.
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    \9\ The term ``Market Hours'' means the period of time beginning 
at 9:30 a.m. ET and ending at 4:00 p.m. ET (or such earlier time as 
may be designated by Nasdaq on a day when Nasdaq closes early). The 
term ``Pre-Market Hours'' means the period of time beginning at 4:00 
a.m. ET and ending immediately prior to the commencement of Market 
Hours. The term ``Post-Market Hours'' means the period of time 
beginning immediately after the end of Market Hours and ending at 
8:00 p.m. ET. See Rule 4701(g).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ 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 Exchange believes that this proposal is consistent with 
the Act because it will add a new functionality (cancelling an order 
for any reason instead of adjusting its price) that is not currently 
available on the Exchange. The Exchange believes that this new 
functionality is consistent with the Act because it will allow firms 
that use this Order to utilize their own routing infrastructure in 
determining how to execute a retail customer order, which will 
facilitate the efficient execution of those orders. Nasdaq believes 
that it is reasonable to offer this Order to retail customers only, as 
this Order will provide firms that handle retail customer orders with 
an alternative to the functionality for handling retail order flow that 
currently exists on the Exchange. The Exchange also notes that it 
already offers functionalities that are tailored to retail customer 
order flow, such as the RTFY routing option. In offering firms that 
handle retail customer orders an alternative to the functionality that 
currently exists on Nasdaq for retail customer orders, the Exchange 
believes that it may attract additional retail customer order flow to 
the Exchange, which would increase the diversity of order flow on the 
Exchange and enhance the Exchange's market quality.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Nasdaq believes that the attributes of the Retail Post-Only Order 
are also consistent with the Act. Nasdaq notes that some of the Order's 
attributes, such as size and attribution, are the same as the 
attributes of the Post-Only Order, upon which the Retail Post-Only 
Order is based. Nasdaq also notes that the Order's attributes reflect 
the functionality of the Retail Post-Only Order. For example, pegging 
will not be offered as an order attribute, given that the purpose of 
the Order is to cancel rather than have its price adjusted.

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 Retail Post-Only Order is 
an optional order type that will be available for entry through 
Nasdaq's order entry protocols that are most commonly used to submit 
retail customer orders. The Retail Post-Only Order will provide retail 
customers with an order type and a resulting functionality that is not 
currently available on the Exchange. Although the Retail Post-Only 
Order will be offered to retail customers only, Nasdaq believes that 
this does not impose a burden on competition that is not necessary or 
appropriate. In providing an alternative to the Exchange's current 
methods of handling retail customer orders, Nasdaq believes that the 
proposal could stimulate competition by attracting additional retail 
customer order flow to the Exchange, which would increase the diversity 
of order flow on the Exchange and enhance the Exchange's market 
quality.

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-2016-141 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-141. 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

[[Page 75865]]

available publicly. All submissions should refer to File Number SR-
NASDAQ-2016-141 and should be submitted on or before November 22, 2016

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Brent J. Fields,
Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-26301 Filed 10-31-16; 8:45 am]
 BILLING CODE 8011-01-P