80 FR 51850 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt a Kill Switch for NOM

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 165 (August 26, 2015)

[Federal Register Volume 80, Number 165 (Wednesday, August 26, 2015)]
[Notices]
[Pages 51850-51852]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-21080]



[[Page 51850]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75743; File No. SR-NASDAQ-2015-096]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a Kill Switch for NOM

August 20, 2015.
    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 August 7, 2015, 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 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 Chapter VI, Section 6, entitled 
``Acceptance of Quotes and Orders,'' of the rules governing the NASDAQ 
Options Market (``NOM'' or ``Exchange''). The Exchange proposes to 
adopt an optional Kill Switch protection.
    The text of the proposed rule change is available on the Exchange's 
Web site 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 filing is to adopt a new risk protection, a Kill 
Switch, applicable to all NOM Participants. The Kill Switch will allow 
NOM Participants to remove quotes and cancel open orders and prevent 
new order submission. This feature provides firms with a powerful risk 
management tool for immediate control of their quote and order 
activity.
    The Exchange proposes to amend Chapter VI, Section 6, entitled 
``Acceptance of Quotes and Orders,'' to add new section (d) to adopt 
the Kill Switch. The NASDAQ Options Kill Switch will be an optional 
tool that enables Participants to initiate a message(s) \3\ to the 
System to: (i) Promptly remove quotes; and/or (ii) promptly cancel 
orders. Participants may submit a request to the System to remove/
cancel quotes and/or orders based on certain identifiers on either a 
user or group level. Participants may elect to remove quotes and cancel 
orders by Exchange account, port, and/or badge or mnemonic 
(``Identifier'') or by a group (one or more Identifier 
combinations),\4\ which are provided by such Participant to the 
Exchange.\5\ Participants may not remove quotes/orders by symbol. The 
System will send an automated message to the Participant when a Kill 
Switch request has been processed by the Exchange's System.
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    \3\ NOM Participants will be able to utilize an interface to 
send a message to the Exchange to initiate the Kill Switch or they 
may contact the Exchange directly.
    \4\ The type of group permissible would be within a broker-
dealer. For example, this could be including but not limited to all 
market maker accounts or all order entry ports.
    \5\ Orders submitted by NOM Market Makers over Ouch to Trade 
Options (OTTO) interface will be treated as quotes for purposes of 
this rule.
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    If the Participant selects quotes to be cancelled utilizing the 
Kill Switch, the NOM Participant must send a message to the Exchange to 
request the removal of all quotes requested for the certain specified 
Identifier(s).\6\ The NOM Participant will be unable to enter any 
additional quotes for the affected Identifier(s) until re-entry has 
been enabled pursuant to proposed section (d)(iii).\7\
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    \6\ See note 3.
    \7\ Sweeps will also be cancelled. A sweep is a one-sided 
electronic quote submitted over the Specialized Quote Feed, which is 
the market making quoting interface.
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    If the Participant selects orders to be cancelled utilizing the 
Kill Switch, the NOM Participant must send a message to the Exchange to 
request the cancellation of all orders requested for the certain 
specified Identifier(s).\8\ The NOM Participant will be unable to enter 
additional orders for the affected Identifier(s) until re-entry has 
been enabled pursuant to section (d)(iii).
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    \8\ See note 3.
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    Proposed section (d)(iii) stipulates that after quotes and/or 
orders are removed/cancelled by the NOM Participant utilizing the Kill 
Switch, the NOM Participant will be unable to enter additional quotes 
and/or orders for the affected Identifier(s) until the NOM Participant 
has made a request to the Exchange and Exchange staff has set a re-
entry indicator to enable re-entry.\9\ Once enabled for re-entry, the 
System will send a Re-entry Notification Message to the NOM 
Participant. The applicable Clearing Participant for that NOM 
Participant also will be notified of the re-entry into the System after 
quotes and/or orders are removed/cancelled as a result of the Kill 
Switch, provided the Clearing Participant has requested to receive such 
notification.
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    \9\ The NOM Participant must directly and verbally contact the 
Exchange to request the re-set.
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    The Exchange offers many risk mitigation and management tools today 
including, but not limited to, certain rapid fire risk controls,\10\ 
15c3-5 risk controls, Order Price Protections,\11\ and cancel on 
disconnect and purge functionality for Specialized Quote Feed (SQF), 
Ouch to Trade Orders (OTTO) and FIX. The Kill Switch offers 
Participants a means to control their exposure, through an interface 
which is not dependent on the integrity of the Participant's own 
systems, should the Participant experience a failure.
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    \10\ See NOM Rules at Chapter VII, Section 6(f).
    \11\ See NOM Rules at Chapter VI, Section 18.
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    The Exchange proposes to implement this rule within ninety (90) 
days of the implementation date. The Exchange will issue an Options 
Trader Alert in advance to inform market participants of such date.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by enhancing the risk protections available

[[Page 51851]]

to Exchange members. The proposal promotes policy goals of the 
Commission which has encouraged execution venues, exchange and non-
exchange alike, to enhance risk protection tools and other mechanisms 
to decrease risk and increase stability.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The individual firm benefits of enhanced risk protections flow 
downstream to counter-parties both at the Exchange and at other options 
exchanges, thereby increasing systemic protections as well. 
Additionally, because the Exchange offers this risk tool to all NOM 
Participants, the Exchange believes it will encourage liquidity 
generally and remove impediments to and perfect the mechanism of a free 
and open market and a national market system and protect investors and 
the public interest.
    This optional risk tool as noted above will be offered to all NOM 
Participants. The Exchange further represents that its proposal will 
operate consistently with the firm quote obligations of a broker-dealer 
pursuant to Rule 602 of Regulation NMS and that the functionality is 
not mandatory. Specifically, any interest that is executable against a 
NOM Participant's quotes and orders that are received \14\ by the 
Exchange prior to the time the Kill Switch is processed by the System 
will automatically execute at the price up to the NOM Participant's 
size. The Kill Switch message will be accepted by the System in the 
order of receipt in the queue and will be processed in that order so 
that interest that is already accepted into the System will be 
processed prior to the Kill Switch message.
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    \14\ The time of receipt for an order or quote is the time such 
message is processed by the Exchange book.
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    A NOM Market Makers' obligation to provide continuous two-sided 
quotes on a daily basis is not diminished by the removal of such quotes 
and/or orders by utilizing the Kill Switch. NOM Market Makers will be 
required to provide continuous two-sided quotes on a daily basis. NOM 
Market Makers that utilize the Kill Switch will not be relieved of the 
obligation to provide continuous two-sided quotes on a daily basis, nor 
will it prohibit the Exchange from taking disciplinary action against a 
NOM Market Maker for failing to meet the continuous quoting obligation 
each trading day.
    With respect to providing information regarding the removal of 
quotes and/or cancellation of orders as a result of the Kill Switch to 
the Clearing Participant, each Member that transacts through a Clearing 
Member on the Exchange executes a Letter of Guarantee wherein the 
Clearing Member accepts financial responsibility for all Exchange 
transactions made by the NOM Participant on whose behalf the Clearing 
Member submits the letter of guarantee. The Exchange believes that 
because Clearing Members guarantee all transactions on behalf of a 
Participant, and therefore bear the risk associated with those 
transactions, it is appropriate for Clearing Members to have knowledge 
of the utilization of the Kill Switch, should the Clearing Member 
request such notification.

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. The proposal does not impose an 
undue burden on inter-market competition because all NOM Participants 
may avail themselves of the Kill Switch, which functionality will be 
optional. The proposed rule change is meant to protect NOM Participants 
in the event the NOM Participant is suffering from a systems issue or 
from the occurrence of unusual or unexpected market activity that would 
require them to withdraw from the market in order to protect investors. 
The ability to control risk at either the user or group level will 
permit the NOM Participant to protect itself from inadvertent exposure 
to excessive risk at the each level. Reducing such risk will enable NOM 
Participants to enter quotes and orders without any fear of inadvertent 
exposure to excessive risk, which in turn will benefit investors 
through increased liquidity for the execution of their orders. Such 
increased liquidity benefits investors because they receive better 
prices and because it lowers volatility in the options market. For 
these reasons, the Exchange does not believe this proposal imposes an 
undue burden on inter-market competition, rather the proposed rule 
change will 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.

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 Exchange 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 [email protected]. Please include 
File Number SR-NASDAQ-2015-096 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-2015-096. 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.

[[Page 51852]]

    All submissions should refer to File Number SR-NASDAQ-2015-096 and 
should be submitted on or before September 16, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-21080 Filed 8-25-15; 8:45 am]
 BILLING CODE 8011-01-P