Document ID: SEC-2018-0694-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2018-05-04T04:00Z

[Federal Register Volume 83, Number 87 (Friday, May 4, 2018)]
[Notices]
[Pages 19847-19850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09448]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83132; File No. SR-NASDAQ-2018-031]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 4702(b)(5), Rule 4703(d), Rule 4752(d)(2)(B), and Rule 
4754(b)(2)(B)

April 30, 2018.
    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 18, 2018, 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 amend Rule 4702(b)(5) and Rule 4703(d) to 
prevent Midpoint Peg Post-Only Orders and Orders entered with a 
Midpoint Pegging Order Attribute from participating in the Nasdaq Halt 
Cross, and (2) to amend Rule 4752(d)(2)(B) and Rule 4754(b)(2)(B) to 
state that Open Eligible Interest and Close Eligible Interest, 
respectively, are used in determining the ``imbalance'' for purposes of 
those rules.
    The text of the proposed rule change is available on the Exchange's 
website 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.

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

1. Purpose
    The purpose of the proposed rule change is to: (1) Amend Rule 
4702(b)(5) and Rule 4703(d) to prevent Midpoint Peg Post-Only Orders 
(``MPPOs'') and Orders entered with a Midpoint Pegging Order Attribute 
(``Midpoint Pegged Orders'') from participating in the Nasdaq Halt 
Cross, and (2) to amend Rule 4752(d)(2)(B) and Rule 4754(b)(2)(B) to 
state that Open Eligible Interest and Close Eligible Interest, 
respectively, are used in determining the ``imbalance'' for purposes of 
those rules.
Excluding MPPOs and Midpoint Pegged Orders From the Nasdaq Halt Cross
    An ``MPPO'' is defined in Rule 4702(b)(5)(A) as an Order Type with 
a Non-Display Order Attribute that is priced at the midpoint between 
the national best bid and offer (``NBBO''), and that will execute upon 
entry only in circumstances where economically beneficial to the party 
entering the Order. Today, Rule 4702(b)(5)(C) provides that MPPOs are 
available during Market Hours only, and may not participate in the 
Nasdaq Opening Cross conducted pursuant to Rule 4752 or the Nasdaq 
Closing Cross conducted pursuant to Rule 4754.\3\ However, MPPOs are 
not similarly prohibited from participating in the Nasdaq Halt Cross 
conducted pursuant to Rule 4753--i.e., the process for determining the 
price at which Eligible Interest shall be executed at the open of 
trading for a halted security and for executing that Eligible Interest.
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    \3\ An MPPO entered prior to the beginning of Market Hours will 
be rejected, and an MPPO remaining on the Nasdaq Book at 4:00 p.m. 
ET will be cancelled by the System. See Rule 4702(b)(5)(C).
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    Similar to current behavior for the Nasdaq Opening Cross and the 
Nasdaq Closing Cross, the Exchange believes that it would be beneficial 
for members and investors to prevent MPPOs from executing in the Nasdaq 
Halt Cross, as these Orders are designed for regular trading on the 
Exchange's continuous market where there is an active market

[[Page 19848]]

that can be used to price these Orders. The Exchange therefore proposes 
to amend Rule 4702(b)(5)(C) to provide that MPPOs may not participate 
in the Nasdaq Halt Cross. Furthermore, the Exchange proposes to add 
language to Rule 4702(b)(5)(C) that explains that MPPOs will be 
cancelled by the System when a trading halt is declared, and any MPPOs 
entered during a trading halt will be rejected. The System currently 
rejects MPPOs entered when a trading halt is in effect but does not 
cancel existing MPPOs when the trading halt is declared. The proposed 
behavior will ensure that MPPOs do not participate in the subsequent 
reopening of the halted security in the Nasdaq Halt Cross by cancelling 
existing MPPOs when the trading halt is declared in addition to 
curtailing the ability of members to enter new MPPOs during the trading 
halt, which the Exchange believes is consistent with the intention of 
this Order Type. Furthermore, MPPOs will be handled consistently across 
the Nasdaq Opening Cross, Nasdaq Closing Cross, and Nasdaq Halt Cross, 
which is consistent with how the Exchange believes members want these 
orders treated.
    Furthermore, the Exchange proposes to remove language describing 
MPPO behavior in a cross where the MPPO locks a preexisting Order. 
Specifically, Rule 4702(b)(5)(A) contains language that states that: 
``For purposes of any cross in which a Midpoint Peg Post-Only Order 
participates, a Midpoint Peg Post-Only Order to buy (sell) that is 
locking a preexisting Order shall be deemed to have a price equal to 
the price of the highest sell Order (lowest buy Order) that would be 
eligible to execute against the Midpoint Peg Post-Only Order in such 
circumstances. Thus, a Midpoint Peg Post-Only Order to buy that locked 
a preexisting Non-Displayed Order to sell at $11.03 would be deemed to 
have a price of $11.02. It should be noted, however, that Midpoint Peg 
Post-Only Orders may not be entered prior to the Nasdaq Opening Cross, 
and the System cancels Midpoint Peg Post-Only Orders prior to the 
commencement of the Nasdaq Closing Cross.'' This language, which only 
applies to MPPOs that participate in a cross, is no longer necessary as 
MPPOs will be systematically prohibited from trading in any cross--
i.e., the Nasdaq Opening Cross, Nasdaq Halt Cross, or Nasdaq Closing 
Cross. The Exchange therefore proposes to eliminate this language from 
its rulebook.\4\
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    \4\ This language references that MPPOs do not participate in 
the Nasdaq Opening Cross or Nasdaq Closing Cross. Although the 
Exchange is not changing that behavior, the Exchange proposes to 
remove this reference, which is duplicative of language described 
above in Rule 4702(b)(5)(C).
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    In addition to MPPOs the Exchange offers Midpoint Pegged Orders. 
Rule 4703(d) describes the Pegging Order Attribute, including Midpoint 
Pegging. Pegging is an Order Attribute that allows an Order to have its 
price automatically set with reference to the NBBO. Midpoint Pegging 
means Pegging with reference to the midpoint between the Inside Bid and 
the Inside Offer. Midpoint Pegged Orders are not displayed. Like MPPOs, 
Midpoint Pegged Orders are also designed for regular trading on the 
Exchange's continuous market where there is an active market that can 
be used to price these Orders. Thus, similar to the proposed handling 
of MPPOs the Exchange proposes to prevent Midpoint Pegged Orders from 
participating in the Nasdaq Halt Cross. As such, the Exchange proposes 
to amend Rule 4703(d) to provide that Orders with Midpoint Pegging will 
be cancelled by the System when a trading halt is declared, and any 
Orders with the Midpoint Pegging Order Attribute entered during a 
trading halt will be rejected. Similar to MPPOs, the System currently 
rejects Midpoint Pegged Orders entered when a trading halt is in effect 
but does not cancel existing Midpoint Pegged Orders when the trading 
halt is declared. Similar to the behavior of MPPOs described above, the 
proposed behavior for Midpoint Pegged Orders will ensure that Midpoint 
Pegged Orders do not participate in the subsequent reopening of the 
halted security in the Nasdaq Halt Cross by cancelling existing 
Midpoint Pegged Orders when the trading halt is declared in addition to 
curtailing the ability of members to enter new Midpoint Pegged Orders 
during the trading halt, thereby ensuring that no Orders with this 
Order Attribute will participate in the Nasdaq Halt Cross.
Nasdaq Opening Cross and Nasdaq Closing Cross Imbalance
    The Exchange disseminates an Order Imbalance Indicator beginning at 
9:28 a.m. to increase market transparency ahead of the Nasdaq Opening 
Cross, and beginning at 3:50 p.m. to increase market transparency ahead 
of the Nasdaq Closing Cross. The Order Imbalance Indicator includes 
several data elements that provide information about the crosses, 
including the Current Reference Price, the number of paired shares at 
that price, and the size of any Imbalance. On July 13, 2017, the 
Exchange filed a proposed rule change that, among other things, amended 
language describing the Current Reference Price, the associated paired 
share count, and the definition of Imbalance.\5\ Specifically, the 
Exchange amended Rule 4752(a) to exclude Open Eligible Interest from 
these data elements for the Nasdaq Opening Cross, and amended Rule 
4754(a) to exclude Close Eligible Interest from these data elements for 
the Nasdaq Closing Cross.
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    \5\ See Securities Exchange Act Release Nos. 81188 (July 21, 
2017), 82 FR 35014 (July 27, 2017) (Notice); 81556 (September 8, 
2017), 82 FR 43264 (September 14, 2017) (Approval Order) (SR-NASDAQ-
2017-061).
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    With these changes, ``Imbalance'' is now correctly defined in the 
rulebook: (1) For the Nasdaq Opening Cross, as the number of shares of 
buy or sell MOO, LOO or Early Market Hours orders that may not be 
matched with other MOO, LOO, Early Market Hours, or OIO order shares at 
a particular price at any given time, and (2) for the Nasdaq Closing 
Cross, as the number of shares of buy or sell MOC or LOC orders that 
cannot be matched with other MOC or LOC, or IO order shares at a 
particular price at any given time. Prior to SR-Nasdaq-2017-061, the 
definition of Imbalance had mistakenly included Open Eligible Interest 
as contra-side interest for matching MOO, LOO or Early Market Hours 
orders when calculating the size of any Imbalance in the Nasdaq Opening 
Cross, and mistakenly included Close Eligible Interest as contra-side 
interest for matching MOC or LOC orders when calculating the size of 
any Imbalance for the Nasdaq Closing Cross.
    The term Imbalance, however, is also used in other parts of the 
Nasdaq Opening Cross and Nasdaq Closing Cross rules. For example, the 
term Imbalance is used: (1) In Rule 4752(d)(2)(B) to describe a tie-
breaker used to determine the Nasdaq Opening Cross price if more than 
one price would maximize the number of shares of MOO, LOO, OIO, Early 
Market Hours orders, and executable quotes and orders in the Nasdaq 
Market Center to be executed pursuant to Rule 4752(d)(2)(A), and (2) in 
Rule 4754(b)(2)(B) to describe a tie-breaker used to determine the 
Nasdaq Closing Cross price if more than one price would maximize the 
number of shares of Eligible Interest in the Nasdaq Market Center to be 
executed pursuant to Rule 4754(b)(2)(A). Specifically, these rules 
provide that if more than one price exists under Rule 4752(d)(2)(A) or 
Rule 4754(b)(2)(A), each of which are described above, the Nasdaq 
Opening Cross and Nasdaq Closing Cross, respectively, shall occur at 
the price that minimizes any Imbalance.

[[Page 19849]]

    In fact, if more than one price exists under Rule 4752(d)(2)(A), 
the Nasdaq Opening Cross shall occur at the price that minimizes the 
number of shares of buy or sell MOO, LOO or Early Market Hours orders 
that may not be matched with other MOO, LOO, Early Market Hours, Open 
Eligible Interest, or OIO order shares--i.e., the previous definition 
of Imbalance under Rule 4752(a)(1). Similarly, if more than one price 
exists under Rule 4754(b)(2)(A), the Nasdaq Closing Cross shall occur 
at the price that minimizes the number of shares of buy or sell MOC or 
LOC orders that cannot be matched with other MOC or LOC, Close Eligible 
Interest or IO order shares--i.e., the previous definition of Imbalance 
under Rule 4754(a)(2). While Open Eligible Interest and Close Eligible 
Interest are not included in the definition of Imbalance for purposes 
of the Order Imbalance Indicator as such interest may be executed prior 
to the execution of the cross, they are included in the cross price 
calculation if remaining on the book at the time the cross is executed. 
The Exchange therefore proposes to amend Rule 4752(d)(2)(B) and Rule 
4754(b)(2)(B) to appropriately describe the tie-breakers discussed 
above using the previous definition of Imbalance for the Nasdaq Opening 
Cross and Nasdaq Closing Cross, respectively.
Implementation
    The Exchange proposes to introduce the changes described in this 
proposed rule change in Q2 2018. The Exchange will announce the 
implementation date of this functionality in an Equity Trader Alert 
issued to members prior to the launch date.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\7\ 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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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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Excluding MPPOs and Midpoint Pegged Orders From the Nasdaq Halt Cross
    As indicated in the Exchange's current rules, MPPOs are designed 
for Market Hours trading and therefore do not participate in either the 
Nasdaq Opening Cross or Nasdaq Closing Cross. Nevertheless, MPPOs may 
trade in the Nasdaq Halt Cross today. The Exchange believes that 
members prefer not to have their MPPOs executed in any of the crosses, 
including the Nasdaq Halt Cross, and is therefore proposing to cancel 
MPPOs when a trading halt is initiated. Furthermore, the System already 
prevents the subsequent entry of MPPOs during the trading halt as 
reflected in the proposed rule. The Exchange believes that it is 
consistent with the protection of investors and the public interest to 
treat MPPOs similarly across all three crosses so that members have a 
consistent experience when entering MPPOs at different times of the 
trading day.
    The proposed changes would also eliminate language in the MPPO 
rules that describe MPPO handling during a cross. As explained in the 
purpose section of this proposed rule change, this language will no 
longer be necessary since MPPOs will be prohibited from participating 
in any of the Exchange's three crosses--i.e., the Nasdaq Opening Cross, 
Nasdaq Closing Cross, and Nasdaq Halt Cross. The Exchange believes that 
this proposed change is consistent with the protection of investors and 
the public interest because it will properly reflect that MPPOs are no 
longer eligible for any crosses, and will only trade on the continuous 
book.
    Similar to the proposed handling of MPPOs, the Exchange is also 
proposing to prevent Midpoint Pegging Orders from participating in the 
Nasdaq Halt Cross. The Exchange believes that it is consistent with the 
protection of investors and the public interest to cancel these Orders 
when a trading halt is initiated so that they cannot participate in the 
Nasdaq Halt Cross. Furthermore, the System already prevents the 
subsequent entry of additional such Orders during a trading halt. The 
Exchange believes that members do not want their Midpoint Pegging 
Orders to trade in the Nasdaq Halt Cross and is therefore introducing 
functionality that will ensure that these Orders will not do so.
Nasdaq Opening Cross and Nasdaq Closing Cross Imbalance
    The Exchange believes that the proposed changes regarding the 
Nasdaq Opening Cross and Nasdaq Closing Cross price calculations are 
consistent with the protection of investors and the public interest 
because these changes properly identify the tie-breakers used to 
determine the opening and closing prices when multiple prices would 
satisfy the maximum quantity requirements of Rule 4752(d)(2)(A) or Rule 
4754(b)(2)(A), respectively. Open Eligible Interest or Close Eligible 
Interest are not used in determining the size of any Imbalance for the 
Order Imbalance Indicator because such interest may be executed before 
the time of the cross. Such interest is used in the opening and closing 
price tie-breakers pursuant to Rule 4752(d)(2)(B) and Rule 
4754(b)(2)(B), however, because it is available to execute in the 
crosses if remaining on the book at the time of the cross price 
calculation. Using all available interest in these price calculations, 
rather than only on-open or on-close order types ensures that these 
price discovery mechanisms properly reflect the interest available at 
the time the crosses are conducted. The Exchange's rules previously 
included Open Eligible Interest and Close Eligible Interest in the tie-
breakers when such interest was included in the definition of 
Imbalance. With the recent changes to those definitions--which now 
align with the interest considered in the Imbalance field of the Order 
Imbalance Indictor--the Exchange believes that it is necessary to 
update Rule 4752(d)(2)(B) and Rule 4754(b)(2)(B).

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. Currently, MPPOs and Midpoint 
Pegging Orders can participate in the Nasdaq Halt Cross despite the 
fact that these Orders are designed for regular trading on the 
continuous book. The Exchange is now enhancing MPPO and Midpoint 
Pegging Order handling to prevent all such Orders from participating in 
the Nasdaq Halt Cross by cancelling existing interest on the Exchange's 
order book in addition to rejecting new Orders as done by the System 
today. The Exchange does not believe this change will have any 
significant impact on competition as the proposed changes will apply to 
all MPPOs and Midpoint Pegging Orders. Moreover, the Exchange believes 
that this is how members want these Orders treated. Furthermore, the 
proposed changes with respect to the Nasdaq Opening Cross and Nasdaq 
Closing Cross price calculations are rule corrections and will 
therefore have no impact on competition.

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.

[[Page 19850]]

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 \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \10\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \11\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposed rule change may become operative upon filing. Waiver of 
the operative delay would allow the Exchange to prevent MPPOs and 
Midpoint Pegged Orders from participating in the Nasdaq Halt Cross 
without delay. The Commission also notes that the proposal would ensure 
that MPPOs and Midpoint Pegged Orders do not participate in any cross 
(i.e., Nasdaq Opening Cross, Nasdaq Halt Cross, and Nasdaq Closing 
Cross). According to the Exchange, MPPOs and Midpoint Pegged Orders are 
designed for regular trading on the Exchange's continuous market, and 
the proposal would ensure that these orders behave in a manner 
consistent with members' expectations. Moreover, waiver of the 
operative delay would allow the Exchange to immediately correct its 
rules to reflect that Open Eligible Interest and Close Eligible 
Interest (i.e., interest that is available to execute in the crosses if 
remaining on the book at the time of the cross price calculation) are 
included in tie-breakers for the Nasdaq Opening Cross and Nasdaq 
Closing Cross price calculations, respectively, thus reducing any 
potential member confusion surrounding the cross price calculations. 
The Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Accordingly, the Commission hereby waives the 30-day operative delay 
and designates the proposed rule change operative upon filing.\12\
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    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 [email protected]. Please include 
File Number SR-NASDAQ-2018-031 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-2018-031. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent 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-2018-031 and should be submitted 
on or before May 25, 2018.

    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. 2018-09448 Filed 5-3-18; 8:45 am]
 BILLING CODE 8011-01-P