Document ID: SEC-2022-0166-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2022-02-02T05:00Z

[Federal Register Volume 87, Number 22 (Wednesday, February 2, 2022)]
[Notices]
[Pages 5926-5929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02077]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94076; File No. SR-NASDAQ-2022-006]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Enable Exchange Members To 
Enter Midpoint Extended Life Orders and M-ELO Plus Continuous Book 
Orders With an Immediate-or-Cancel Time-in-Force Instruction

January 27, 2022.
    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 January 19, 2022, 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 enable Exchange members to enter Midpoint 
Extended Life Orders (``M-ELOs'') and M-ELO Plus Continuous Book (``M-
ELO+CB'') Orders with an immediate-or-cancel (``IOC'') Time-in-Force 
(``TIF'') instruction.\3\
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    \3\ Citations herein to the Nasdaq Rule 4000 Series shall refer 
to Equity 4.
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    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

[[Page 5927]]

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 Exchange proposes to amend Rule 4702(b)(14) and (by 
implication) 4702(b)(15) to enable Exchange members to enter M-ELO and 
M-ELO+CB Orders with an IOC time-in-force instruction.
    On March 7, 2018, the Commission issued an order approving the 
Exchange's proposal to adopt the M-ELO as a new Order Type.\4\ A M-ELO 
is a non-displayed order that is available to all members but interacts 
only with other M-ELOs and M-ELO+CBs. It is priced at the midpoint 
between the National Best Bid and Offer (``NBBO'') and it does not 
become eligible for execution until at least 10 milliseconds elapse 
after its entry (the ``Holding Period'').\5\ Once the Holding Period 
elapses, a M-ELO becomes eligible for execution against other M-ELOs 
and M-ELO+CBs on a time-priority basis.\6\
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    \4\ See Securities Exchange Act Release No. 34-82825 (Mar. 7, 
2018), 83 FR 10937 (Mar. 13, 2018) (order approving SR-NASDAQ-2017-
074).
    \5\ In 2020, the Commission issued an order approving the 
Exchange's proposal to shorten the Holding Period for M-ELO and M-
ELO+CB Orders from one half second to 10 milliseconds. See 
Securities Exchange Act Release No. 34-88743 (April 24, 2020), 85 FR 
24068 (April 30, 2020) (order approving SR-NASDAQ-2020-011). If a 
member modifies a MELO or M-ELO+CB during the Holding Period, other 
than to decrease the size of the order or to modify the marking of a 
sell order as long, short, or short exempt, then such modification 
will cause the Holding Period to reset.
    \6\ If a member modifies a M-ELO or M-ELO+CB after the Holding 
Period elapses, other than to decrease the size of the order or to 
modify the marking of a sell order as long, short, or short exempt, 
then such modification will trigger a new Holding Period for the 
order.
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    A M-ELO+CB is an Order Type that has all the characteristics and 
attributes of a M-ELO Order, except that a M-ELO+CB that satisfies the 
Holding Period is eligible to execute (at the midpoint of the NBBO) 
against other eligible M-ELO+CBs, eligible M-ELOs, and also eligible 
non-displayed Orders with Midpoint Pegging and Midpoint Peg Post-Only 
Orders (``Midpoint Orders'') resting on the Exchange's Continuous 
Book.\7\
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    \7\ A M-ELO+CB is eligible to execute against a Midpoint Order 
if: (i) The Midpoint Order has the Midpoint Trade Now Attribute 
enabled; (ii) no other order is resting on the Continuous Book that 
has a more aggressive price than the current midpoint of the NBBO; 
(iii) the Midpoint Order has rested on the Exchange's Continuous 
Book for a minimum of 10 milliseconds after the NBBO midpoint falls 
within the limit set by the participant; and (iv) the Midpoint Order 
satisfies any minimum quantity requirement of the M-ELO+CB. A buy 
(sell) M-ELO+CB is ranked in time order at the midpoint among other 
buy (sell) M-ELO+CBs, buy (sell) Midpoint Extended Life Orders, and 
buy (sell) Midpoint Orders, as of the time when such Orders become 
eligible to execute. See Rule 4702(a)(15); see also Securities 
Exchange Act Release No. 34-86938 (September 11, 2019), 84 FR 48978 
(September 17, 2019) (order approving SR-NASDAQ-2019-048).
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    Presently, neither M-ELO nor M-ELO+CB Orders may be entered with a 
TIF of IOC. An Order with a TIF of IOC is one that is designated to 
deactivate immediately after determining whether the Order is 
marketable.\8\ In the Exchange's proposal to establish the M-ELO Order 
Type, the Exchange explained that it decided to exclude IOCs from M-
ELOs since it deemed the IOC TIF, by its nature, to be ``inconsistent 
with the Holding Period requirement of the proposal.'' \9\ That is, the 
Exchange designed M-ELO to provide a space where investors with longer 
time horizons, including institutional investors, can interact 
exclusively with each other--by virtue of a mutually-applicable Holding 
Period--without fear that aggressive order types could trade with M-
ELOs or M-ELO+CBs to the detriment of such M-ELOs and M-ELO+CBs 
immediately upon entry and without waiting 10 milliseconds before doing 
so, such as immediately before a change in the NBBO for a particular 
security (i.e., risk of adverse selection). Nevertheless, institutional 
investors--which again are the primary beneficiaries and users of M-ELO 
and M-ELO+CB--have approached the Exchange recently to request the 
ability to enter IOC instructions for their M-ELO and M-ELO+CB Orders 
as a means of assisting them in sourcing liquidity on the Exchange's M-
ELO/M-ELO+CB Book so that they can minimize the opportunity costs of 
utilizing M-ELO and M-ELO+CB Orders and thus render use of M-ELO and M-
ELO+CB more efficient and productive for participants.
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    \8\ Rule 4703(a)(1).
    \9\ See Securities Exchange Act Release No. 34-81311 (August 3, 
2017), 82 FR 37248 (August 9, 2017) (SR-NASDAQ-2017-074).
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    That is, the functionality would provide users with an indication 
as to whether eligible contra-side liquidity would be available to 
their M-ELO or M-ELO+CB Orders and allow these users to streamline 
their decision-making process of whether to send additional M-ELO or M-
ELO+CB Orders to the Exchange or to seek liquidity elsewhere.\10\ It 
would also enable participants whose M-ELO or M-ELO+CB Orders do not 
satisfy the conditions for a Holding Period to commence upon Order 
entry to have those Orders cancel immediately rather than be held by 
the System until such time as the conditions are met, which would allow 
these participants to assess whether they wish to submit new M-ELO or 
M-ELO+CB Orders that would satisfy the conditions to commence a Holding 
Period upon entry.
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    \10\ The Exchange understands that some participants 
representing institutional investor orders have developed methods 
that mimic the functions of IOC.
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    To avoid introducing the risks of adverse selection associated with 
enabling IOC in these contexts (discussed above), brokers representing 
institutional investors requested that when they enter M-ELO and M-
ELO+CB Orders (which are eligible to commence a Holding Period upon 
entry) with an IOC instruction, the IOC instruction should activate 
only at the expiration of the 10 millisecond Holding Period, rather 
than immediately upon Order entry. In other words, only after the 10 
millisecond Holding Period elapses would the System check to see if a 
M-ELO or M-ELO+CB Order with an IOC TIF is able to execute immediately 
against contra-side resting liquidity; if so, the Order will execute as 
it would currently, but if not, the System will automatically cancel 
the Order rather than keep it on the Book. If the Order at the time of 
entry is unable to begin the Holding Period (because, for example, it 
is entered with a limit price that is not at or better than the 
midpoint of the NBBO, if there is no NBB or NBO at the time of entry, 
or the NBBO is crossed at the time of entry), then the Order will be 
automatically cancelled immediately.
    The Exchange agrees with the participants that requested this IOC 
functionality that when modified in this manner, its use with M-ELO and 
M-ELO+CB would serve a beneficial purpose that is not inconsistent with 
the Exchange's intentions and designs for these Order Types. That is, 
it would

[[Page 5928]]

permit IOC users to check the M-ELO or M-ELO+CB Book for contra-side 
liquidity, but not in an aggressive or riskless fashion.\11\ Users of 
the IOC functionality in this context would still need to endure the 
Holding Period before utilizing it, and then execute against contra-
side interest if it is available upon expiration of that Holding 
Period. While the proposal would provide for immediate cancellation of 
M-ELO and M-ELO+CB Orders that do not meet the conditions for a Holding 
Period to commence upon entry, the cancellation of these M-ELOs and M-
ELO+CBs would only indicate that such Orders are not eligible to enter 
the Holding Period (i.e., the NBBO is crossed at the time of entry, 
there is no NBB or NBO at the time of entry, or the Order is entered 
with a limit price that is not at or better than the NBBO midpoint) and 
would not indicate whether there are available contra-side M-ELOs or M-
ELO+CBs at the time of entry on Nasdaq. The Exchange also notes that, 
in other contexts, the use of IOCs is routine and recognized as a 
prudent way to seek liquidity in a fragmented market, and its use in 
this context, as modified, should not be controversial.
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    \11\ Nasdaq reiterates that by design, spread-crossing orders do 
not interact with MELO or M-ELO+CB Orders.
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    Accordingly, the Exchange now proposes to amend Rule 4702(b)(14) 
(and implicitly, Rule 4702(b)(15)), because it would incorporate 
amendments to Rule 4702(b)(14)) to permit members to enter M-ELO and M-
ELO+CB Orders with a TIF instruction of IOC, with the caveat that, when 
used for these Order Types, the IOC instruction will activate upon the 
expiration of the Holding Period, unless the Order is unable to begin 
the Holding Period upon entry, in which case it will cancel 
immediately.
    As part of the surveillance the Exchange currently performs, M-ELOs 
and M-ELO+CBs with IOC would be subject to real-time surveillance to 
determine if they are being abused by market participants. In addition, 
as is the case for ordinary M-ELOs and M-ELO+CBs, the Exchange will 
monitor the use of M-ELOs and M-ELO+CBs with IOC with the intent to 
apply additional measures, as necessary, to ensure their usage is 
appropriately tied to the intent of the Order Types. The Exchange is 
committed to determining whether there is opportunity or prevalence of 
behavior that is inconsistent with normal risk management behavior, 
such as excessive cancellations. Manipulative abuse is subject to 
potential disciplinary action under the Exchange's Rules, and other 
behavior that is not necessarily manipulative but nonetheless 
frustrates the purposes of the M-ELO or M-ELO+CB Order Types may be 
subject to penalties or other participant requirements to discourage 
such behavior, should it occur.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The proposal will assist market participants in sourcing liquidity 
on the Exchange's M-ELO/M-ELO+CB Book so that they can minimize the 
opportunity costs associated with utilizing M-ELO and M-ELO+CB Orders 
and thus render use of M-ELO and M-ELO+CB more efficient and 
productive. At the same time, the proposal avoids exposing M-ELO and M-
ELO+CB orders to the risks of adverse selection associated with 
aggressive IOC by proposing that, when used in the contexts of M-ELO 
and M-ELO+CB Orders, the IOC instruction will activate only at the 
expiration of the 10 millisecond Holding Period, rather than 
immediately upon Order entry, as orders with a TIF of IOC do in other 
contexts. The exception to this is if the M-ELO or M-ELO+CB Order with 
an IOC instruction is unable to begin the Holding Period upon entry, as 
will occur if the Market is crossed at the time of entry, there is no 
NBB or NBO at the time of entry, or the Order is entered with a limit 
price that is not at or better than the NBBO midpoint. In such cases, 
the Order will be cancelled immediately upon entry. Doing so is 
consistent with the spirit of the IOC instruction, in that the market 
participant is indicating a desire for their Order to persist for the 
minimum period possible, while a M-ELO or M-ELO+CB Order that is 
ineligible to begin the Holding Period upon entry could potentially 
persist in a held state until it is cancelled by the System at the end 
of Market Hours. Crucially, the immediate cancel of an Order that is 
ineligible to begin the Holding Period upon entry does not provide 
information to the participant about the underlying state of the M-ELO/
M-ELO+CB Book.\14\ When used in this context, IOC will not be useful to 
participants engaging in strategies that are time sensitive. Thus, this 
proposal will not frustrate the underlying design of M-ELO and M-ELO+CB 
Orders, which again is to provide investors, including institutional 
investors, with longer time horizons to safely interact with each other 
without interacting with aggressive or time sensitive orders.
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    \14\ The existence of resting interest on the M-ELO/M-ELO+CB 
Book is not a prerequisite for the Order to enter the Holding 
Period. Therefore, the cancellation of these M-ELOs and M-ELO+CBs 
only indicate that such Orders are not eligible to enter the Holding 
Period (i.e., the NBBO is crossed at the time of entry, there is no 
NBB or NBO at the time of entry, or the Order is entered with a 
limit price that is not at or better than the NBBO midpoint) and 
does not indicate whether there are available contra-side M-ELOs or 
M-ELO+CBs at the time of entry on Nasdaq. Consequently, the IOC 
instruction cannot be exploited to check the Book for liquidity in a 
riskless fashion (e.g., by cancelling before the Holding Period 
expires).
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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. To the contrary, the proposal 
will enhance the utility and efficiency of the M-ELO and M-ELO+CB Order 
Types, which in turn will render the Exchange a more attractive venue 
for market participants that stand to benefit from these Order Types. 
The proposed IOC instruction will not burden intra-market competition 
as it will be available for use by all market participants.

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.

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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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2022-006 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-2022-006. 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 (https://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 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-2022-006 and should 
be submitted on or before February 23, 2022.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02077 Filed 2-1-22; 8:45 am]
BILLING CODE 8011-01-P