Document ID: SEC-2012-0984-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-06-20T04:00Z

[Federal Register Volume 77, Number 119 (Wednesday, June 20, 2012)]
[Notices]
[Pages 37086-37089]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15055]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67203; File No. SR-NASDAQ-2012-066]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a New Market Maker 
Peg Order Available to Exchange Market Makers

June 14, 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 June 6, 2012, the NASDAQ Stock Market LLC (``NASDAQ'' or the 
``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 adopt a new Market Maker Peg Order to 
provide similar functionality as the automated functionality provided 
to market makers under Rules 4613(a)(2)(F) and (G).
    The text of the proposed rule change is below. Proposed new 
language is in 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) No change.
    (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)-(14) No change.
    (15) ``Market Maker Peg Order'' is a limit order that, upon entry, 
the bid or offer is automatically priced by the System at the 
Designated Percentage away from the then current National Best Bid and 
National Best Offer, or if no National Best Bid or National Best Offer, 
at the Designated Percentage away from the last reported sale from the 
responsible single plan processor in order to comply with the quotation 
requirements for Market Makers set forth in Rule 4613(a)(2). Upon 
reaching the Defined Limit, the price of a Market Maker Peg Order bid 
or offer will be adjusted by the System to the Designated Percentage 
away from the then current National Best Bid and National Best Offer, 
or, if no National Best Bid or National Best Offer, to the Designated 
Percentage away from the last reported sale from the responsible single 
plan processor. If a Market Maker Peg Order bid or offer moves a 
specified number of percentage points away from the Designated 
Percentage towards the then current National Best Bid or National Best 
Offer, as described in Rule 4613(a)(2)(F) (Quotation Creation and 
Adjustment), the price of such bid or offer will be adjusted to the 
Designated Percentage away from the then current National Best Bid and 
National Best Offer, or if no National Best Bid or National Best Offer, 
to the Designated Percentage away from the last reported sale from the 
responsible single plan processor. In the absence of a National Best 
Bid or National Best Offer and if no last reported sale, the order will 
be cancelled or rejected. Market Maker Peg Orders are not eligible for 
routing pursuant to Rule 4758 and are always

[[Page 37087]]

displayed on NASDAQ. Notwithstanding the availability of Market Maker 
Peg Order functionality, a Market Maker remains responsible for 
entering, monitoring, and re-submitting, as applicable, quotations that 
meet the requirements of Rule 4613. A new timestamp is created for the 
order each time that it is automatically adjusted. For purposes of this 
paragraph, NASDAQ will apply the Designated Percentage and Defined 
Limit as set forth in Rule 4613, subject to the following exception. 
Nothing in this rule shall preclude a Market Maker from designating a 
more aggressive offset from the National Best Bid or National Best 
Offer than the given Designated Percentage for any individual Market 
Maker Peg Order. If a Market Maker designates a more aggressive offset 
from the National Best Bid or National Best Offer, the price of a 
Market Maker Peg Order bid or offer will be adjusted by the System to 
maintain the Market Maker-designated offset from the National Best Bid 
or National Best Offer, or if no National Best Bid or National Best 
Offer, the order will be cancelled or rejected.
    (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 adopt a new Market Maker Peg Order to 
provide similar functionality presently available to Exchange market 
makers under Rules 4613(a)(2)(F) and (G). NASDAQ will continue to offer 
the present automated quote management functionality provided to market 
makers under Rules 4613(a)(2)(F) and (G) for a period of 3 months after 
the implementation of the proposed Market Maker Peg Order. The purpose 
of this transition period, during which both the present automated 
quote management functionality under Rules 4163(a)(2)(F) and (G) and 
the Market Maker Peg Order will operate concurrently, is to afford 
market makers with the opportunity to adequately test the new Market 
Maker Peg Order and migrate away from the present automated quote 
management functionality under Rules 4613(a)(2)(F) and (G). Prior to 
the end of this 3 month period, NASDAQ will submit a rule filing to 
retire the automated quote management functionality under Rules 
4613(a)(2)(F) and (G).
    NASDAQ adopted Rules 4613(a)(2)(F) and (G) as part of an effort to 
address issues uncovered by the aberrant trading that occurred on May 
6, 2010.\3\ The automated quote management functionality (``AQ'') 
offered by these rules is designed to help Exchange market makers meet 
the enhanced market maker obligations adopted post May 6, 2010,\4\ and 
avoid execution of market maker ``stub quotes'' in instances of 
aberrant trading.\5\ As part of these enhanced obligations, NASDAQ 
requires market makers for each stock in which they are registered to 
continuously maintain a two-sided quotation within a designated 
percentage of the National Best Bid and National Best Offer,\6\ as 
appropriate. Although AQ has been successful in allowing Exchange 
market makers to meet their enhanced obligations and in avoiding the 
deleterious effect on the markets caused by ``stub quote'' executions, 
AQ presents difficulties to market makers in meeting their obligations 
under Rule 15c3-5 under the Act (the ``Market Access Rule'') \7\ and 
Regulation SHO.\8\
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    \3\ Securities Exchange Act Release No. 63255 (November 5, 
2010), 75 FR 69484 (November 12, 2010) (SR-NASDAQ-2010-115, et al.).
    \4\ Id.
    \5\ For each issue in which a market maker is registered, AQ 
automatically creates a quotation for display to comply with market 
making obligations. Compliant displayed quotations are thereafter 
allowed to rest and are not further adjusted unless the relationship 
between the quotation and its related national best bid or national 
best offer, as appropriate, shrinks to the greater of: (a) 4 
percentage points, or, (b) one-quarter the applicable percentage 
necessary to trigger an individual stock trading pause as described 
in Rule 4120(a)(11), or expands to within that same percentage less 
0.5%, whereupon AQ will immediately re-adjust and display the market 
maker's quote to the appropriate designated percentage. Quotations 
originally entered by market makers are allowed to move freely 
towards the national best bid or national best offer, as 
appropriate, for potential execution. In the event of an execution 
against a System (as defined in Rule 4751(a)) created compliant 
quotation, the market maker's quote is refreshed by AQ on the 
executed side of the market at the applicable designated percentage 
away from the then national best bid (offer), or if no national best 
bid (offer), the last reported sale. Rule 4613(F) & (G).
    \6\ As defined by Regulation NMS Rule 600(b)(42). 17 CFR 
242.600.
    \7\ 17 CFR 240.15c3-5.
    \8\ 17 CFR 242.200 through 204.
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    The Market Access Rule requires a broker-dealer with market access, 
or that provides a customer or any other person with access to an 
exchange or alternative trading system through use of its market 
participant identifier or otherwise, to establish, document, and 
maintain a system of risk management controls and supervisory 
procedures reasonably designed to manage the financial, regulatory, and 
other risks of this business activity. These controls must be 
reasonably designed to ensure compliance with all regulatory 
requirements, which are defined as ``all federal securities laws, rules 
and regulations, and rules of self-regulatory organizations, that are 
applicable in connection with market access.'' \9\
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    \9\ 17 CFR 240.15c3-5.
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    In addition to the obligations of the Market Access Rule, broker-
dealers have independent obligations that arise under Regulation SHO. 
Regulation SHO obligations generally include properly marking sell 
orders, obtaining a ``locate'' for short sale orders, closing out fail 
to deliver positions, and, where applicable, complying with the short 
sale price test.\10\ While there are certain exceptions to some of the 
requirements of Regulation SHO where a market maker is engaged in bona-
fide market making activities,\11\ the availability of

[[Page 37088]]

those exceptions is distinct and independent from whether a market 
maker submits an order that is a Market Maker Peg Order.
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    \10\ Supra note 9.
    \11\ See 17 CFR 242.203(b)(1). The Commission adopted a narrow 
exception to Regulation SHO's ``locate'' requirement for market 
makers that may need to facilitate customer orders in a fast moving 
market without possible delays associated with complying with such 
requirement. Only market makers engaged in bona fide market making 
in the security at the time they effect the short sale are excepted 
from the ``locate'' requirement. See Exchange Act Release No. 50103 
(July 28, 2004), 69 FR 48008, 48015 (August 6, 2004) (providing 
guidance as to what does not constitutes bona-fide market making for 
purposes of claiming the exception to Regulation SHO's ``locate'' 
requirement). See also Exchange Act Release No. 58775 (October 14, 
2008), 73 FR 61690, 61698-9 (October 17, 2008) (providing guidance 
regarding what is bona-fide market making for purposes of complying 
with the market maker exception to Regulation SHO's ``locate'' 
requirement including without limitation whether the market maker 
incurs any economic or market risk with respect to the securities, 
continuous quotations that are at or near the market on both sides 
and that are communicated and represented in a way that makes them 
widely accessible to investors and other broker-dealers and a 
pattern of trading that includes both purchases and sales in roughly 
comparable amounts to provide liquidity to customers or other 
broker-dealers). Thus, market makers would not be able to rely 
solely on quotations priced in accordance with the Designated 
Percentages under proposed Rule 4751(f)(15) or the AQ functionality 
under Rules 4163(a)(2)(F) and (G) for eligibility for the bona-fide 
market making exception to the ``locate'' requirement based on the 
criteria set forth by the Commission. It should also be noted that a 
determination of bona-fide market making is relevant for the 
purposes of a broker-dealers close-out obligations under Rule 204 of 
Regulation SHO. See 17 CFR 242.204(a)(3).
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    The current AQ functionality offered to market makers reprices and 
``refreshes'' a market maker's quote when it is executed against, 
without any action required by the market maker. When a market maker's 
quote is refreshed by the Exchange, however, the market maker has an 
obligation to ensure that the requirements of the Market Access Rule 
and Regulation SHO are met. To meet these obligations, a market maker 
must actively monitor the status of its quotes and ensure that the 
requirements of the Market Access Rule and Regulation SHO are being 
satisfied.
Market Maker Peg Order
    In an effort to simplify market maker compliance with the 
requirements of the Market Access Rule and Regulation SHO, NASDAQ is 
proposing to adopt a new order type available only to Exchange market 
makers, which offers AQ-like functionality but also allows a market 
maker to comply with the requirements of the Market Access Rule and 
Regulation SHO. Specifically, NASDAQ is proposing to replace AQ 
functionality with the Market Maker Peg Order. The Market Maker Peg 
Order would be a one-sided limit order and similar to other peg orders 
available to market participants in that the order is tied or 
``pegged'' to a certain price,\12\ but it would not be eligible for 
routing pursuant Rule 4758 and would always be displayed and 
attributable (as defined in Rule 4751). The Market Maker Peg Order 
would be limited to market makers and would have its price 
automatically set and adjusted, both upon entry and any time 
thereafter, in order to comply with the Exchange's rules regarding 
market maker quotation requirements and obligations.\13\ It is expected 
that market makers will perform the necessary checks to comply with 
Regulation SHO, as discussed above, prior to entry of a Market Maker 
Peg Order. Upon entry and at any time the order exceeds either the 
Defined Limit, as described in Rule 4613(a)(2)(E), or moves a specified 
number of percentage points away from the Designated Percentage towards 
the then current National Best Bid or National Best Offer, as described 
in Rule 4613(a)(2)(F), the Market Maker Peg Order would be priced by 
the Exchange at the Designated Percentage \14\ away from the then 
current National Best Bid and National Best Offer, or, if no National 
Best Bid or National Best Offer, to the Designated Percentage away from 
the last reported sale from the responsible single plan processor. In 
the absence of a National Best Bid or National Best Offer and last 
reported sale, the order will be cancelled or rejected. Adjustment to 
the Designated Percentage is designed to avoid an execution against a 
Market Maker Peg Order that would initiate a single stock circuit 
breaker. In the event of an execution against a Market Maker Peg Order 
that reduces the size of the Market Maker Peg Order below one round 
lot, the market maker would need to enter a new order, after performing 
the regulatory checks discussed above, to satisfy their obligations 
under Rule 4613.\15\ In the event that pricing the Market Maker Peg 
Order at the Designated Percentage away from the then current National 
Best Bid and National Best Offer, or, if no National Best Bid or 
National Best Offer, to the Designated Percentage away from the last 
reported sale from the responsible single plan processor would result 
in the order exceeding its limit price, the order will be cancelled or 
rejected.
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    \12\ Rule 4751(f)(4) defines Pegged Orders.
    \13\ The Market Maker Peg Order is one-sided so a market maker 
seeking to use Market Maker Peg Orders to comply with the Exchange's 
rules regarding market maker quotation requirements would need to 
submit both a bid and an offer using the order type.
    \14\ The Designated Percentage is the individual stock pause 
trigger percentage under Rule 4120(a)(11) (or comparable rule of 
another exchange) less two (2) percentage points. See Rule 
4613(a)(2)(D).
    \15\ Rule 4613 generally sets forth NASDAQ market maker 
requirements, which include quotation and pricing obligations, and 
the firm quote obligation.
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    NASDAQ is also proposing to allow a market maker to designate an 
offset more aggressive (i.e., smaller) than the Designated Percentage 
for any given Market Maker Peg Order. This functionality will allow a 
market maker to quote at price levels that are closer to the National 
Best Bid and National Best Offer if it elects to do so. To use this 
functionality, a market maker must designate the desired offset upon 
order entry.\16\ Thereafter and unlike the default \17\ Market Maker 
Peg Order, a Market Maker Peg Order with a market maker-designated 
offset will have its price automatically adjusted on a tick-by-tick 
basis by the System to maintain the market maker-designated offset from 
the National Best Bid or National Best Offer until the order is 
executed or cancelled.\18\ In the absence of a National Best Bid or 
National Best Offer, Market Maker Peg Orders with a market maker-
designated offset will be cancelled or rejected. In the event that 
pricing the Market Maker Peg Order at the market maker-designated 
offset away from the then current National Best Bid and National Best 
Offer would result in the order exceeding its limit price, the order 
will be cancelled or rejected.
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    \16\ If a market maker wishes, it can designate a more 
aggressive bid while using the Defined Percentage and Defined Limit 
for its offer, or vice versa.
    \17\ In the absence of an offset designation, a Market Maker Peg 
Order will default to using the Defined Percentage and Defined 
Limit, and the repricing process whereby, upon reaching the Defined 
Limit, the price of a Market Maker Peg Order bid or offer will be 
adjusted by the System to the Designated Percentage away from the 
then current National Best Bid or National Best Offer, or, if no 
National Best Bid or National Best Offer, to the Designated 
Percentage away from the last reported sale from the responsible 
single plan processor.
    \18\ Market Maker Peg Orders with a market maker-designated 
offset may be able to qualify as bona-fide market making for 
purposes of Regulation SHO, depending on the facts and 
circumstances. A market maker entering such an order must consider 
the factors set forth by the Commission in determining whether 
reliance on the exception from the ``locate'' requirement of Rule 
203 for bona-fide market making is appropriate with respect to the 
particular Market Maker Peg Order and its designated offset. See 
supra note 12.
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    The Market Maker Peg Order will be accepted and executable during 
System hours. During pre- and post-market hours, the wider Designated 
Percentage and Defined Limit associated with the 9:30 a.m.-9:45 a.m. 
and 3:35 p.m.-4:00 p.m. periods under Rule 4613(a)(2)(D) and (E) will 
be applied.
    NASDAQ believes that this order-based approach is superior in terms 
of the ease in complying with the requirements of the Market Access 
Rule and Regulation SHO while also providing similar quote adjusting 
functionality to its market makers. Market makers would have control of 
order origination, as required by the Market Access Rule, while also 
allowing market makers to make marking and locate determinations prior 
to order entry, as required by Regulation SHO. As such, market makers 
are fully able to comply with the requirements of the Market Access 
Rule and Regulation SHO, as they would when placing any order, while 
also meeting their Exchange market making obligations. In this regard, 
the Market Maker Peg Order, like the current AQ system, does not ensure 
that the market maker is satisfying the requirements of Regulation SHO, 
including the satisfaction of the locate requirement of Rule 203(b)(1) 
or an exception thereto.

[[Page 37089]]

2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Act,\19\ which requires the rules of an exchange 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 
proposed rule change also is designed to support the principles of 
Section 11A(a)(1) \20\ of the Act in that it seeks to assure fair 
competition among brokers and dealers and among exchange markets. The 
Exchange believes that the proposed rule meets these requirements in 
that it promotes transparency and uniformity across markets concerning 
minimum market maker quotation requirements and member obligations to 
comply with the regulatory requirements of the Market Access Rule and 
Regulation SHO. The Exchange also believes that providing Exchange 
market makers with a transition period, during which they may 
adequately test the new functionality, will serve to minimize the 
potential market impact caused by the implementation of the order type.
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    \19\ 15 U.S.C. 78f(b)(5).
    \20\ 15 U.S.C. 78k-1(a)(1).
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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 necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date 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 shall:
    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-2012-066 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-2012-066. 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-2012-066 and should 
be submitted on or before July 11, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-15055 Filed 6-19-12; 8:45 am]
BILLING CODE 8011-01-P