Document ID: SEC-2012-1079-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Correcting Various NASDAQ Options Market Rules
Posted Date: 2012-07-05T04:00Z

[Federal Register Volume 77, Number 129 (Thursday, July 5, 2012)]
[Notices]
[Pages 39774-39777]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16377]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67301; File No. SR-NASDAQ-2012-077]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Correcting Various NASDAQ Options Market Rules

June 28, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on June 26, 2012, The NASDAQ Stock Market LLC (``NASDAQ'') 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 is filing with the Commission a proposal for the NASDAQ 
Options Market (``NOM'') to amend the following provisions: Chapter I, 
Section 3 to add additional exchanges to the list of those rules 
incorporated by reference; Chapter V, Section 3 to provide that market 
maker interest is cancelled during a halt;

[[Page 39775]]

Chapter VI, Section 1(d) to delete Attributable and Non-Attributable 
orders; Chapter VI, Section 1(e)(3) to provide that Minimum Quantity 
Orders are treated as having a time-in-force designation of Immediate 
or Cancel (``IOC''); Chapter VI, Section 1(e)(8), to provide that 
Intermarket Sweep Orders (``ISOs'') may have any time-in-force 
designation except WAIT; Chapter VI, Section 2(a) to provide that 
option contracts on certain fund shares or broad-based indexes may 
close as of 4:15 p.m.; Chapter VI, Section 6(a)(1) to make clear that 
Market Orders are accepted; Chapter VI, Section 11, to provide that 
routing is limited to System Securities; and Chapter VII, Section 12, 
Commentary .03 to update the reference to non-displayed trading 
interest. NASDAQ also proposes minor typographical changes to several 
rules, as explained further below.
    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, 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, NASDAQ 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. NASDAQ 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ proposes to correct and clarify various provisions in NOM 
rules. Specifically, NASDAQ proposes to amend Chapter I, Section 3, to 
add to the list of those rules incorporated by reference. Currently, 
the rule refers to the Financial Industry Regulatory Authority 
(``FINRA''), but not to the Chicago Board Options Exchange nor to the 
New York Stock Exchange, which are now proposed to be added. NASDAQ 
believes that the proposed change is not controversial, because it 
merely codifies two additional exchanges into the provision that covers 
rules that are incorporated by reference.
    NASDAQ proposes to amend Chapter V, Section 3, to provide that 
market maker interest is cancelled during a halt. Currently, this 
provision states that during a halt, the Exchange will maintain 
existing orders on the book, accept orders, and process cancels. 
However, Market Maker interest entered pursuant to the obligations 
contained in Chapter VII, Section 5 is cancelled. Therefore, NASDAQ 
proposes to add this language to the rule to more accurately reflect 
what occurs during a halt. Furthermore, it is not reasonable for a 
Market Maker to determine an option's price without taking into account 
the event that caused the halt in that option, and it is not beneficial 
to the market to maintain the quotes of Market Makers when an option 
halts. Therefore, NASDAQ believes that the proposed change is not 
controversial.
    NASDAQ proposes to amend Chapter VI, Section 6(a)(1) to delete 
reference to a limit price to be clear that market orders are accepted. 
NASDAQ believes that this proposal is not controversial, because 
another rule already provides that market orders are accepted.\3\ 
Specifically, it will now provide that all System orders shall indicate 
whether they are a call or put and buy or sell and a price, if any.
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    \3\ See Chapter VI, Section 1(e)(5).
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    NASDAQ also proposes to amend Chapter VI, Section 1(e)(3), to 
provide that Minimum Quantity Orders are treated as having a time-in-
force designation of Immediate or Cancel (``IOC''). The current 
language of Chapter VI, Section 1(e)(3) states that Minimum Quantity 
Orders may only be entered with a time-in-force designation of IOC; 
however, in actuality, Minimum Quantity Orders with any time-in-force 
designation may be entered and will be treated as IOC. Accordingly, the 
provision should say that Minimum Quantity Orders are treated as having 
a time-in-force designation of IOC, regardless of the time-in-force 
designation on the order. This has been the case since NOM launched in 
2008 and NASDAQ recently realized that the language should be 
corrected. NASDAQ does not believe that this is a controversial change 
to NOM's rules, because it accurately described the operation of the 
System, and, NASDAQ notes that the System has been accepting more 
orders, which is useful to order entry firms. In addition, treating a 
Minimum Quantity Order as IOC regardless of the time-in-force 
designation on the order is akin to how NOM handles All-or-None orders 
today, which are very similar.\4\
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    \4\ See Securities Exchange Act Release No. 64983 (July 28, 
2011), 76 FR 46869 (August 3, 2011) (SR-NASDAQ-2011-098).
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    NASDAQ proposes to amend Chapter VI, Section 1(d) to delete 
Attributable and Non-Attributable Orders. Attributable orders are 
orders that are designated for display (price and size) next to the 
Participant's MPID.\5\ Non-Attributable Orders are orders that are 
entered by a Participant that is designated for display (price and 
size) on an anonymous basis in the order display service of the System. 
NOM no longer offers Attributable Orders, such that, as of September 
29, 2011, all orders on NOM are non-attributable. NASDAQ does not 
believe that this is controversial, because Attributable Orders were 
rarely used on NOM.\6\
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    \5\ See NASDAQ Rule 4611(d), which, among other things, defines 
an MPID.
    \6\ Since NOM stopped offering them, no one has requested 
Attributable Orders. At least one other exchange, Phlx, does not 
have attributable orders.
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    In addition, NASDAQ proposes to amend Chapter VI, Section 1(e)(8), 
to provide that ISOs may have any time-in-force designation except 
WAIT. The current language implies that all ISOs have a time-in-force 
designation of IOC, but that is not the case. ISOs can have a time-in-
force of Day, GTC or IOC; ISOs that are marked as Day or GTC lose the 
ISO designation once posted on the book, meaning the order is no longer 
considered an ISO when posted on the book. If an entering firm cancels/
replaces that resting Day ISO order, the replacement order cannot be 
marked as ISO. NASDAQ does not believe that this is controversial, 
because it is useful to order entry firms to be able to submit ISOs 
other than IOC and another exchange also permits this.\7\
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    \7\ See CBOE Rule 6.53(p).
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    NASDAQ also proposes to amend Chapter VI, Section 2(a) to provide 
that option contracts on certain fund shares or broad-based indexes 
will close as of 4:15 p.m., not all fund shares. Many options on fund 
shares stop trading at 4 p.m. both on NOM as well as other options 
exchanges.\8\ Thus, the rule is more accurate, as proposed to be 
amended. NASDAQ does not believe that this is controversial, because 
NASDAQ provides product-specific notice of the trading hours on its Web 
site.
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    \8\ http://www.nasdaqtrader.com/dynamic/SymDir/options.txt for a 
list of products traded on NOM with the indicator ``N'' for a 4 p.m. 
closing.
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    Further, NASDAQ proposes to amend Chapter VI, Section 11, to 
provide that routing is limited to System Securities. System Securities 
are all options that are currently trading on NOM pursuant

[[Page 39776]]

to Chapter IV. All other options are Non-System Securities.\9\ At one 
time, NOM offered routing of Non-System Securities but has not offered 
such routing since November 30, 2011. NASDAQ notes that this routing 
feature was rarely used and was discontinued.\10\ Currently, NOM only 
routes securities that are listed on NOM. Accordingly, the language 
relating to routing of Non-System Securities is being deleted. 
Specifically, NASDAQ proposes to delete Section 11(b), which pertains 
solely to the routing of Non-System Securities. In addition, the 
portion of Section 11(e) describing NASDAQ Options Services LLC's 
(``NOS'') role in routing Non-System Securities is being deleted. 
NASDAQ does not believe that this is controversial, because most 
exchanges do not offer this feature, the feature was rarely used and, 
in general, exchanges are not required to route orders in securities 
they do not offer for trading.
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    \9\ See Chapter VI, Section 1(b).
    \10\ At least one other exchange only routes securities that 
trade on that exchange. See e.g., Phlx Rule 1080(m).
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    NASDAQ also proposes to amend Chapter VII, Section 12, Commentary 
.03 to delete the reference to non-displayed trading interest. NOM no 
longer has any order types with non-displayed interest; previously, NOM 
offered Discretionary Orders and Reserve Orders on NOM, but both have 
been eliminated.\11\ NASDAQ notes that although NOM still offers Price 
Improving Orders, such orders do not have non-displayed interest.\12\ 
Chapter VII, Section 12, Commentary .03 will now provide that 
respecting Price Improving Orders, the exposure requirement of 
subsection (i) is satisfied if the displayable portion of the order is 
displayed at its displayable price for one second.\13\ NASDAQ does not 
believe that this is controversial, because it merely corrects rule 
language to be more specific to the only relevant order type that 
remains.
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    \11\ See Securities Exchange Act Release No. 65873 (December 2, 
2011), 76 FR 76786 (December 8, 2011) (SR-NASDAQ-2011-164).
    \12\ ``Price Improving Orders'' are orders to buy or sell an 
option at a specified price at an increment smaller than the minimum 
price variation in the security. Price Improving Orders may be 
entered in increments as small as one cent. Price Improving Orders 
that are available for display shall be displayed at the minimum 
price variation in that security and shall be rounded up for sell 
orders and rounded down for buy orders. See Chapter VI, Section 
1(e)(6).
    \13\ The order exposure requirement is that, with respect to 
orders routed to NOM, Options Participants may not execute as 
principal orders they represent as agent unless (i) agency orders 
are first exposed on NOM for at least one (1) second or (ii) the 
Options Participant has been bidding or offering on NOM for at least 
one (1) second prior to receiving an agency order that is executable 
against such bid or offer. See Chapter VII, Section 12.
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    NASDAQ also proposes minor typographical changes to the following 
rules: Chapter III, Section 13(c) (Mandatory Systems Testing); Chapter 
III, Section 14(a) (Limit on Outstanding Uncovered Short Positions); 
Chapter III, Section 15(g) (Significant Business Transactions of 
Options Clearing Participants); Chapter IV, Section 6(g) (Series of 
Options Contracts Open for Trading); Chapter XII, Section 3(b) (Locked 
and Crossed Markets); and Chapter XIV, Section 3(b)(12) (Designation of 
a Broad-Based Index).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ in particular, in that it is designed to 
promote just and equitable principles of trade by making various 
deletions and corrections that each contributes to the maintenance of 
fair and orderly markets. Adding reference to which exchange rules are 
incorporated by reference helps Participants better understand what 
rules apply, which should promote just and equitable principles of 
trade. Cancelling Market Maker interest during a trading halt helps 
Market Makers reasonably manage their risk, consistent with just and 
equitable principles of trade. Leaving a Market Maker's quote in the 
market during a halt could lead to dislocated prices when the security 
resumes trading after the halt, which would be confusing to investors. 
NASDAQ believes it is better to remove Market Maker quotes so that 
Market Makers can re-enter a fresh set of two-sided quotes that reflect 
the information that was disseminated during the halt. These fresh 
quotes should provide investors and the market as a whole with better 
and more accurate prices. Treating Minimum Quantity Orders as having a 
time-in-force designation of IOC also promotes just and equitable 
principles of trade by helping order entry firms manage their risk. 
Furthermore, allowing Minimum Quantity Orders to rest on the book 
potentially introduces complexity and confusion without adding value, 
because investors who might see Minimum Quantity Orders through a data 
feed may not understand why they are not able to trade with those 
orders. If an incoming order is smaller than the minimum quantity 
designated on the resting Minimum Quantity Order, it will not execute. 
Accordingly, NASDAQ believes that it is simpler for investors to 
interact with the market if Minimum Quantity Orders are treated as IOC.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    In addition, making clearer that Market Orders are accepted should 
promote just and equitable principles of trade, by removing an 
inconsistency between two rules so firms know that such orders are 
permitted. Furthermore, accepting Market Orders in addition to Limit 
Orders provides investors with additional tools for market 
participation. Additional order choices helps Participants achieve 
their investment objectives when interacting with the market. At least 
one other exchange recognizes this and allows both limit and market 
orders.\16\
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    \16\ See e.g., Phlx Rule 1080(b).
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    Deleting the terms Attributable Order and Non-Attributable Order 
also promotes just and equitable principles of trade by making clear 
that all orders are non-attributable. NASDAQ experienced no demand for 
the ability to provide attribution to orders. Neither consumers of 
NASDAQ data, nor the providers of orders requested attribution 
functionality. As such, NASDAQ removed this ability to simplify its 
systems and the related rules.
    Permitting ISOs to have a time-in-force designation other than IOC 
assists order entry firms in managing ISOs, because some firms may seek 
to have such orders post on the book if they do not immediately 
execute, which promotes just and equitable principles of trade. 
Allowing a Participant to post an ISO, after having properly submitted 
the required ISOs to other exchanges with equal or better prices, 
should provide the market and investors with superior prices. It also 
helps the Participant who submitted the ISO to more accurately reflect 
the value they assign to the security designated on the order.
    Specifying that option contracts on certain fund shares or broad-
based indexes may close at 4:15 p.m. is intended to correct the rule to 
be clear that some such products close at 4 p.m., which should promote 
just and equitable principles of trade. Generally, the more information 
that is available to the market, the better it is for investors. In 
particular, the more accurate the information is, the better market 
participants can manage their objectives. Correcting this language will 
make it clear to investors that some products close at 4 p.m. and some 
close at 4:15 p.m. The ability to get the closing times for specific 
funds from the NOM Web site will provide participants with the precise 
information they need.

[[Page 39777]]

    Limiting routing to System Securities is common, such that 
eliminating the routing of Non-System Securities should not have a 
significant effect on Participants and correcting the rule makes this 
clear, which should promote just and equitable principles of trade. As 
stated above, it is common practice for options exchanges to only route 
orders for securities that are listed on the exchange. In fact, it is 
NASDAQ's understanding that NOM was the only exchange that offered 
routing for securities not listed on NOM. NOM experimented with the 
feature to explore whether there was an underserved customer segment 
and discovered that the feature often led to confusion and operational 
headaches for Participants and thus was rarely used.
    Deleting the reference to non-displayed trading interest is merely 
a correction to address that previously available order types are no 
longer covered by this provisions, which provides better clarity, and 
thereby promotes just and equitable principles of trade. As discussed 
above, this reference was in place to reflect how NOM viewed the 
exposure rule in relation to Reserve Order, which were eliminated. 
NASDAQ inadvertently left this language in the rulebook which created 
confusion for members. Clarity with respect to the exposure rule 
provides Participants with a better understanding of how to comply with 
this rule.
    Accordingly, NASDAQ believes that all of the changes proposed 
herein should promote just and equitable principles of trade, 
consistent with Section 6(b)(5).

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.

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

    The Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to Section 
19(b)(3)(A) \17\ of the Act and Rule 19b-4(f)(6)(iii) thereunder \18\ 
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.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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. 
The Exchange has satisfied this requirement.
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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.

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-2012-077 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-2012-077. 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 
a.m. and 3 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-2012-077 and should 
be submitted on or before July 26, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16377 Filed 7-3-12; 8:45 am]
BILLING CODE 8011-01-P