Document ID: SEC-2017-0774-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2017-05-15T04:00Z

[Federal Register Volume 82, Number 92 (Monday, May 15, 2017)]
[Notices]
[Pages 22364-22368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09713]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80630; File No. SR-NASDAQ-2017-043]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 4702 (Order Types)

May 9, 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 April 26, 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) to modify 
the behavior of Post-Only Orders in certain situations.
    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.

[[Page 22365]]

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 this proposal is to amend Rule 4702 (Order Types) to 
modify the behavior of Post-Only Orders in certain situations.
    As stated in Rule 4702(b)(4)(A), a Post-Only order is designed to 
have its price adjusted as needed to post to the Nasdaq Book in 
compliance with Rule 610(d) under Regulation NMS by avoiding the 
display of quotations that lock or cross any Protected Quotation in a 
System Security during Market Hours, or to execute against locking or 
crossing quotations in circumstances where economically beneficial to 
the Participant entering the Post-Only Order.
    The purpose of this proposal is to provide members with the option 
of cancelling their order if the price of the Post Only Order would 
otherwise have its price adjusted. This functionality will apply when 
(1) an incoming Post-Only Order locks or crosses a Protected Quotation; 
(2) an adjusted Post-Only Order locks or crosses a displayed Order at 
its displayed price on the Nasdaq Book; or (3) a Post-Only Order would 
not lock or cross a Protected Quotation but would lock or cross a 
displayed Order at its displayed price on the Nasdaq Book. This 
functionality will be offered as a port setting and may be applied to 
all orders entered under the same MPID for Orders entered through RASH, 
QIX and FIX, or, in the case of market participants using the OUCH or 
FLITE order entry protocol, may be applied to all Orders entered 
through a specific order entry port and under the same MPID.
    The first change relates to incoming Post-Only Orders that lock or 
cross a Protected Quotation. Currently, Rule 4702(b)(4)(A) states that, 
if a Post-Only Order would lock or cross a Protected Quotation, the 
price of the Order will first be adjusted. If the Order is 
Attributable, its adjusted price will be one minimum price increment 
lower than the current Best Offer (for bids) or higher than the current 
Best Bid (for offers).\3\ If the Order is not Attributable, its 
adjusted price will be equal to the current Best Offer (for bids) or 
the current Best Bid (for offers). However, the Order will not post or 
execute until the Order, as adjusted, is evaluated with respect to 
Orders on the Nasdaq Book.
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    \3\ As set forth in Rule 4703(i), an Order with Attribution is 
referred to as an ``Attributable Order'' and an Order without 
attribution is referred to as a ``Non- Attributable Order.'' Rule 
4703(i) defines Attribution as an Order Attribute that 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.
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    Nasdaq proposes to amend the behavior for both incoming Non-
Attributable and Attributable Post-Only Orders that lock or cross a 
Protected Quotation on an away market center. In both cases, the Post-
Only Order may either be adjusted or be cancelled back to the 
Participant, depending on the Participant's choice. However, the Post-
Only Order will execute if (i) it is priced below $1.00 and the value 
of price improvement associated with executing against an Order on the 
Nasdaq Book (as measured against the original limit price of the Order) 
equals or exceeds the sum of fees charged for such execution and the 
value of any rebate that would be provided if the Order posted to the 
Nasdaq Book and subsequently provided liquidity, or (ii) it is priced 
at $1.00 or more and the value of price improvement associated with 
executing against an Order on the Nasdaq Book (as measured against the 
original limit price of the Order) equals or exceeds $0.01 per share. 
As with the current rule text, the price of the Order will first be 
adjusted if the Participant elects to have the Post-Only Order 
adjusted. Similarly, if the Order is Attributable, its adjusted price 
will be one minimum price increment lower than the current Best Offer 
(for bids) or higher than the current Best Bid (for offers). If the 
Order is not Attributable, its adjusted price will be equal to the 
current Best Offer (for bids) or the current Best Bid (for offers). 
However, the Order will not post or execute until the Order, as 
adjusted, is evaluated with respect to Orders on the Nasdaq Book.
    In addition to offering the new cancel functionality where an 
incoming Post-Only Order locks or crosses a Protected Quotation on an 
away market center, Nasdaq is proposing to amend Rule 4702(b)(4)(A) to 
state when that Order would execute, as described above. Nasdaq is 
making this change because it believes that the instances pursuant to 
which a locking or crossing Post-Only order will execute in other 
scenarios (such as a Post-Only Order that locks or crosses a displayed 
Order at its displayed price on the Nasdaq Book) also apply here, e.g., 
the execution of the Post-Only Order would be economically beneficial 
to the participant that entered the Order while contributing to the 
price discovery process.\4\
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    \4\ With this change, Nasdaq is not adding a new functionality 
to Post-Only Orders where the incoming Post-Only Order locks or 
crosses a Protected Quotation on an away market center, but is 
rather clarifying the instances in which the Post-Only Order in this 
scenario will execute.
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    The second change relates to the adjusted price of the Post-Only 
Order if that price would lock or cross a displayed Order at its 
displayed price on the Nasdaq Book. Currently, Rule 4702(b)(4)(A) 
states that, if the adjusted price of the Post-Only Order would lock or 
cross a displayed Order at its displayed price on the Nasdaq Book, the 
Post Only Order will be repriced, ranked, and displayed at one minimum 
price increment below the current best displayed price to sell on the 
Nasdaq Book (for bids) or above the current best displayed price to buy 
on the Nasdaq Book (for offers). However, the Post-Only Order will 
execute if (i) it is priced below $1.00 and the value of price 
improvement associated with executing against an Order on the Nasdaq 
Book (as measured against the original limit price of the Order) equals 
or exceeds the sum of fees charged for such execution and the value of 
any rebate that would be provided if the Order posted to the Nasdaq 
Book and subsequently provided liquidity, or (ii) it is priced at $1.00 
or more and the value of price improvement associated with executing 
against an Order on the Nasdaq Book (as measured against the original 
limit price of the Order) equals or exceeds $0.01 per share.
    Nasdaq proposes to amend this provision to allow the Post-Only 
Order to either be adjusted or be cancelled back to the Participant in 
this scenario, depending on the Participant's choice. As with the 
current language of this section, however, the Post-Only Order will 
execute if (i) it is priced below $1.00 and the value of price 
improvement associated with executing against an Order on the Nasdaq 
Book (as measured against the original limit price of the Order) equals 
or exceeds the sum of fees charged for such execution and the value of 
any rebate that would be provided if the Order posted to the Nasdaq 
Book and subsequently

[[Page 22366]]

provided liquidity, or (ii) it is priced at $1.00 or more and the value 
of price improvement associated with executing against an Order on the 
Nasdaq Book (as measured against the original limit price of the Order) 
equals or exceeds $0.01 per share. If the Participant elects to have 
the Post-Only Order adjusted, the Order will continue to be treated as 
specified today in the Rule, so that the Post Only Order will be 
repriced, ranked, and displayed at one minimum price increment below 
the current best displayed price to sell on the Nasdaq Book (for bids) 
or above the current best displayed price to buy on the Nasdaq Book 
(for offers).
    The third change relates to a Post-Only Order that would not lock 
or cross a Protected Quotation but would lock or cross a displayed 
Order at its displayed price on the Nasdaq Book. Currently, Rule 
4702(b)(4)(A) states that such an Order will be repriced, ranked, and 
displayed at one minimum price increment below the current best-priced 
Order to sell on the Nasdaq Book (for bids) or above the current best-
priced Order to buy on the Nasdaq Book (for offers). However, the Post-
Only Order will execute if (i) it is priced below $1.00 and the value 
of price improvement associated with executing against an Order on the 
Nasdaq Book equals or exceeds the sum of fees charged for such 
execution and the value of any rebate that would be provided if the 
Order posted to the Nasdaq Book and subsequently provided liquidity, or 
(ii) it is priced at $1.00 or more and the value of price improvement 
associated with executing against an Order on the Nasdaq Book equals or 
exceeds $0.01 per share.
    Nasdaq proposes to amend this provision so that the Order may 
either be adjusted or be cancelled back to the Participant, depending 
on the Participant's choice. However, the Post-Only Order will execute 
if (i) it is priced below $1.00 and the value of price improvement 
associated with executing against an Order on the Nasdaq Book (as 
measured against the original limit price of the Order) equals or 
exceeds the sum of fees charged for such execution and the value of any 
rebate that would be provided if the Order posted to the Nasdaq Book 
and subsequently provided liquidity, or (ii) it is priced at $1.00 or 
more and the value of price improvement associated with executing 
against an Order on the Nasdaq Book (as measured against the original 
limit price of the Order) equals or exceeds $0.01 per share. If the 
Participant elects to have the Post Only Order adjusted, the Post Only 
Order will be repriced, ranked, and displayed at one minimum price 
increment below the current best-priced Order to sell on the Nasdaq 
Book (for bids) or above the current best-priced Order to buy on the 
Nasdaq Book (for offers).
    Finally, Nasdaq is proposing to make a corresponding change to the 
provision in Rule 4702(b)(4)(A) relating to the treatment of Post-Only 
Orders during the Pre-Market and Post-Market Hours. Currently, that 
provision states that, during Pre-Market and Post-Market Hours, a Post-
Only Order will be processed in a manner identical to Market Hours with 
respect to locking or crossing Orders on the Nasdaq Book, but will not 
have its price adjusted with respect to locking or crossing the 
quotations of other market centers. Nasdaq is proposing to amend this 
language to provide that a Post-Only Order that locks or crosses the 
quotation of another market center during the Pre-Market and Post-
Market Hours will not be cancelled or have its price adjusted. The 
purpose of the proposed functionality is to allow a member to cancel 
its Post-Only Order in various circumstances rather than have that 
Order adjusted. To the extent that a Post-Only Order will not have its 
price adjusted if it locks or crosses the quotation of another market 
center during the Pre-Market or Post-Market Hours, there is not a need 
to offer the corresponding cancel functionality.
    With these changes, the Exchange is providing members with an added 
functionality by allowing a member to cancel a Post-Only Order when (1) 
an incoming Post-Only Order locks or crosses a Protected Quotation; (2) 
an adjusted Post-Only Order locks or crosses a displayed Order at its 
displayed price on the Nasdaq Book; and (3) a Post-Only Order would not 
lock or cross a Protected Quotation but would lock or cross a displayed 
Order at its displayed price on the Nasdaq Book, while still setting 
forth instances in which the Order will execute. Nasdaq notes that the 
proposed change only relates to situations where a Post-Only Order 
would lock or cross displayed interest.
    The proposed functionality is consistent with functionalities that 
are currently offered by other exchanges. For example, Bats BZX 
Exchange, Inc. (``BZX'') also offers a Post Only order type,\5\ and 
allows users to select a functionality that will cancel a Post Only 
Order if, upon entry, such order would create a violation of Rule 
610(d) of Regulation NMS by crossing a Protected Quotation of an 
external market, rather than adjusting the price of that order.\6\ BZX 
also provides that any display-eligible Post-Only or Partial Post-Only 
Order that locks or crosses a Protected Quotation displayed by the 
Exchange upon entry will be executed pursuant to Rule 11.9(c)(6) or 
Rule 11.9(c)(7), as applicable, or cancelled.\7\
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    \5\ See BZX Rule 11.9(c)(6). That rule defines a Post Only Order 
as an order that is to be ranked and executed on BZX pursuant to 
Rule 11.12 and Rule 11.13(a)(4) or cancelled, as appropriate, 
without routing away to another trading center except that the order 
will not remove liquidity from the BZX Book, other than as described 
elsewhere in Rule 11.9.
    \6\ See BZX Rule 11.9(g)(1)(A); see also Securities Exchange Act 
Release No. 67657 (August 14, 2012), 77 FR 50199 (August 20, 2012) 
(SR-BATS-2012-35).
    \7\ See BZX Rule 11.9(g)(1)(D); see also Securities Exchange Act 
Release No. 67657 (August 14, 2012), 77 FR 50199 (August 20, 2012) 
(SR-BATS-2012-35).
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    Similarly, Bats EDGX Exchange, Inc. (``EDGX'') provides that, if a 
Limit Order would lock or cross a protected quotation if displayed at 
its limit price at the time of entry into the EDGX system, the user may 
elect to have the order immediately cancel back.\8\
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    \8\ See EDGX Rule 11.8(b)(10); see also Securities Exchange Act 
Release No. 72676 (July 24, 2014), 79 FR 44520 (July 31, 2014) (SR-
EDGX-2014-18).
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    Nasdaq believes that this proposal will benefit liquidity providers 
and the market in general by, among other things, providing members 
with greater flexibility when managing their order flow, and thereby 
promoting the more efficient execution of orders. Market makers and 
liquidity providers are essential to displayed price formation on 
exchanges. The proposal seeks to provide market participants, including 
market makers and liquidity providers, additional flexibility with 
which to handle their orders. In some circumstances, a market maker may 
have its order prices adjusted due to locking or crossing an away 
market price (i.e., the displayed NBBO without Nasdaq) or it may have 
its order price adjusted due to locking or crossing a displayed order 
on the Nasdaq order book. In many cases, these liquidity providers do 
not want to have their price adjusted and would rather have their order 
cancelled so that they can reevaluate the market conditions at the 
time. Today, the market maker may therefore cancel its bid or offer 
once it has determined that the Exchange has repriced the order. Going 
forward, in support of efficient markets that drive price formation and 
price discovery via continuous trading, the Exchange believes that 
providing the flexibility when an incoming order would lock or cross an 
away displayed price or a displayed order on the Nasdaq book will 
increase efficiency and reduce message

[[Page 22367]]

traffic both internal to the Exchange and for external data feed 
consumers.
    The Exchange intends to implement this functionality on or before 
June 30, 2017. The Exchange will announce the new implementation date 
by an Equity Trader Alert, which shall be issued prior to the 
implementation date.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ 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 is proposing to add a new functionality 
(cancelling a Post-Only Order instead of adjusting its price) that is 
not currently available on the Exchange, and that is consistent with 
functionalities that are currently offered by other exchanges. The 
Exchange believes that this new functionality is consistent with the 
Act because, as discussed above, it will provide members with greater 
flexibility when managing their order flow, which will promote the more 
efficient execution of orders. The proposal is also consistent with the 
stated intent of the Post-Only Order, which is to avoid the display of 
quotations that would lock or cross a Protected Quotation. Finally, 
Nasdaq believes that amending Rule 4702(b)(4)(A) to specify when an 
incoming Post-Only Order that locks or crosses a Protected Quotation on 
an away market center would execute is consistent with the Act because, 
as with other the instances pursuant to which a locking or crossing 
Post-Only order will execute, the execution of the Post-Only Order 
would be economically beneficial to the participant that entered the 
Order while contributing to the price discovery process.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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. The Post-Only Order is an 
optional order type that is available for entry through multiple Nasdaq 
order entry protocols. No member is required to use any specific Order 
type or attribute or even to use any Exchange Order type or attribute 
or any Exchange functionality at all. If an Exchange member believes 
for any reason that the proposed rule change will be detrimental, that 
perceived detriment can be avoided by choosing not to enter or interact 
with the Order types modified by this proposed rule change. The 
proposed changes will provide members with a functionality that is not 
currently available on the Exchange, and that is consistent with 
functionalities that are currently offered by other exchanges. The 
proposed changes will apply equally to all Orders that meet the 
proposed criteria. This functionality will facilitate the more 
efficient execution of order flow, which could increase the Exchange's 
market quality and thereby promote competition by attracting additional 
liquidity to the Exchange.

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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
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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-2017-043 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-2017-043. 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-2017-043 and should 
be submitted on or before June 5, 2017.

[[Page 22368]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09713 Filed 5-12-17; 8:45 am]
BILLING CODE 8011-01-P