Document ID: SEC-2014-1727-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2014-10-14T04:00Z

[Federal Register Volume 79, Number 198 (Tuesday, October 14, 2014)]
[Notices]
[Pages 61672-61674]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-24304]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73315; File No. SR-NASDAQ-2014-097]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Algo Test Facility

October 7, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on October 2, 2014, 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, II, and III, below, which Items have been prepared by NASDAQ. 
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

    NASDAQ proposes to offer a new testing environment, The NASDAQ OMX 
Algo Test Facility (``Algo Test Facility'').
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.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
    NASDAQ is proposing to amend NASDAQ Rule 7030 entitled ``Other 
Services'' to offer NASDAQ Testing Facility (NTF) \3\ subscribers 
(``Subscriber'') a new complement to the existing NTF. The Algo Test 
Facility is a sophisticated equity market simulation environment based 
on a detailed historical database which includes NASDAQ display orders 
and trades. During a simulation, Algo Test Facility customers are able 
to use their existing trading infrastructure to interact and trade 
against this virtualized Nasdaq historical market. By providing a 
historically accurate market

[[Page 61673]]

simulation, the Algo Test Facility helps increase the safety and 
security of the market by mitigating aberrant trading behavior.
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    \3\ The NASDAQ Testing Facilities provides firms with the 
ability to test their automated systems that integrate with Nasdaq 
services in a virtual trading environment. This service supplies 
firms with multiple venues to test upcoming Nasdaq releases and 
product enhancements. In addition, firms may use the NTF to test 
their new software development prior to implementation.
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    The Algo Test Facility provides electronic trading customers with: 
(i) A safe environment to rigorously test and calibrate their 
algorithmic strategies by replaying and interacting with real 
historical market data; (ii) significantly higher accuracy and 
determinism on the outcomes of individual orders versus conventional 
paper-trading systems, which are forced to make simple probabilistic 
assumptions about fill rates because they do not replicate and replay 
the market microstructure; (iii) a re-creation of the actual market's 
microstructure and real-world trading conditions, providing accurate 
views of adverse selection, time priority and fills versus misses; (iv) 
support for order entry allowing customers to interact via OUCH \4\ 
protocols; and (v) interaction of customer activity with the actual 
historic orders of other market participants at the microstructure 
level.
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    \4\ The Exchange plans to expand to other order entry protocols 
and order types and include latencies and intercolo latencies in 
future enhancements.
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    The Algo Test Facility allows customers to prototype, backtest, and 
calibrate their strategies against a variety of different kinds of 
real-world market conditions and against real-world market participants 
and competition. The Algo Test Facility allows customers to observe, 
correct, and test a large range of potential unintended behaviors of 
their algorithmic strategies before committing real capital or 
impacting the Exchange and other market participants. Also, customers 
will be able to mitigate the risk of aberrant or potentially 
destabilizing behaviors, such as inadvertent spamming or other 
repetitive behaviors, or excessive risk in open orders.
    Customers would connect via their existing trading infrastructure, 
including risk systems, OMS, and feed handlers currently housed in the 
NASDAQ OMX Data Center in Carteret, New Jersey. The Algo Testing 
Facility will allow up to a certain number of simulations to be run for 
all users to the Algo Test Facility per day. While the Algo Test 
Facility will be available to all NTF subscribers, the capacity of 
simulations is limited to a certain number of simulations per day, 
which is subject to change. The Algo Test Facility will be available on 
a first-come first-serve basis. This limitation will apply equally to 
all users and may increase depending on customer interest. The Exchange 
intends to evaluate the capacity as the product is utilized.
    Customers consume market data in a format that is similar to ITCH 
from the Algo Test Facility and send their orders to the Algo Test 
Facility in response. Delays on the customer side are based uniquely on 
the customers' actual production trading infrastructure and its ability 
to keep up with the Algo Test Facility. Customer orders interact with 
the actual historical order books. Both queue priority and time 
priority are preserved to the microsecond. For example, if a customer 
lifts an offer in the order book 100 microseconds before a competitor 
tried to lift that offer, the customer will get a fill and the 
competitor will either consume the additional liquidity on the book or 
form a new bid. Automated reports will allow customers to observe, 
correct, and test a large range of potential unintended behaviors of 
their algorithmic strategies before committing real capital or 
impacting the Exchange and other market participants. Through new NTF 
hand-offs in Carteret, customers will receive market data in a format 
similar to NASDAQ ITCH market data and have the ability to execute 
trades via the OUCH protocols.\5\
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    \5\ Nasdaq historical data will be available on a rolling T+1 
through six months basis. Only OUCH order entry will be available in 
the initial launch.
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    Customers desiring to utilize the Algo Test Facility would be 
required to be NTF Subscribers to access this environment through NTF 
hand-offs in Carteret. Currently, NTF Subscribers with connectivity to 
Carteret are assessed a fee of $1,000 per hand-off, per month for 
connection to the NTF.\6\ The fees related to the NTF in Rule 7030 will 
continue to be assessed to current NTF Subscribers. The Exchange 
intends to not assess any other fees to NTF Subscribers for use of the 
Algo Test Facility at this time. The Exchange will file a proposed rule 
change with the Commission prior to commencing any additional pricing 
specifically for this product at a later time.
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    \6\ The hand-off fee includes either a 1Gb or 10Gb switch port 
and a cross connect to the NTF. NTF Subscribers also pay a one-time 
installation fee of $1,000 per handoff.
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    Currently, the NTF allows users to test connectivity to the 
Exchange. As discussed, the Algo Test Facility is a complement to the 
NTF, and will be available for testing algorithms, but not for purposes 
of rule compliance or validation.
2. Statutory Basis
    NASDAQ believes that its proposal is consistent with Section 6(b) 
of the Act \7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \8\ in particular, in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest. 
The Exchange believes that by offering this product without charge at 
this time, NTF subscribers will have the opportunity to test the 
product and utilize the benefits the product offers. The product will 
assist NTF subscribers to protect investors and the public interest by 
utilizing the simulations to increase the safety and security of the 
market by mitigating aberrant trading behavior. Customers will be able 
to mitigate the risk of aberrant or potentially destabilizing 
behaviors, such as inadvertent spamming or other repetitive behaviors, 
or excessive risk in open orders. The Algo Test Facility allows 
customers to observe, correct, and test a large range of potential 
unintended behaviors of their algorithmic strategies before committing 
real capital.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\10\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which NASDAQ operates or controls, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. This proposal is consistent with an equitable 
allocation of fees and is not unfairly discriminatory because it offers 
NTF Subscribers a sophisticated equity market simulation environment 
based on a detailed historical database of NASDAQ market data. 
Customers are offered a safe environment to rigorously test and 
calibrate their algorithmic strategies by replaying and interacting 
with real historical market data. Also, the proposal is consistent with 
an equitable allocation of fees and is not unfairly discriminatory 
because the Exchange operates in a highly competitive market in which 
exchanges offer various connectivity services as a means to facilitate 
the trading activities of customers.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange intends to offer this product free of charge at this 
time to NTF Subscribers at this time, so that NTF Subscribers have the 
opportunity

[[Page 61674]]

to utilize the Algo Test Facility at no cost in addition to the current 
NTF Subscription fees set forth in Rule 7030(d)(1)(C). Moreover, the 
Exchange's fees for this service are equitably allocated and non-
discriminatory in that all NTF Subscribers will receive the service 
free of cost. Non-NTF Subscribers would be required to become NTF 
Subscribers and incur the fees borne by these customers today in order 
to receive the Algo Test Facility services at no additional cost.

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.\11\ 
The Exchange does not intend to assess fees to NTF Subscribers at this 
time to utilize the Algo Test Facility. While non-NTF Subscribers would 
be required to become NTF Subscribers in order to receive this service, 
the Exchange does not believe this requirement imposes an undue burden 
on competition because NTF Subscribers today pay costs for the service 
they receive and the hand-offs are necessary for use of the Algo Test 
Facility. All customers are being treated in the same manner and the 
Exchange is offering the Algo Test Facility for free to those NTF 
Subscribers incurring costs today. Also, while there is a limit on the 
number simulations per day for this product, this limitation on the 
number of simulations applies equally to all users per day. Therefore, 
the Exchange believes that the proposed rule change enhances, rather 
than burdens, competition by providing customers an opportunity to 
utilize the product for free.
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    \11\ 15 U.S.C. 78f(b)(8).
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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)(ii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \13\ 17 CFR 240.19b-4(f)(6).
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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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 should be approved or disapproved. The Exchange has 
provided the Commission written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the date of 
filing of the proposed rule change.

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-2014-097 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-097. 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-2014-097 and should 
be submitted on or before November 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24304 Filed 10-10-14; 8:45 am]
BILLING CODE 8011-01-P