80 FR 62591 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change To Adopt a Kill Switch for NOM

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 200 (October 16, 2015)

[Federal Register Volume 80, Number 200 (Friday, October 16, 2015)]
[Notices]
[Pages 62591-62592]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-26327]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76123; File No. SR-NASDAQ-2015-096]


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

October 9, 2015.

I. Introduction

    On August 7, 2015, The NASDAQ Stock Market LLC filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to adopt a risk 
protection functionality referred to as a kill switch that will be 
available to all Participants of the NASDAQ Options Market 
(``Exchange'' or ``NOM''). The proposed rule change was published for 
comment in the Federal Register on August 26, 2015.\3\ The Commission 
received no comment letters on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 75743 (August 26, 
2015), 80 FR 51850 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to offer to all its members a new optional 
risk protection functionality for options to

[[Page 62592]]

help members control their quote and order activity on NOM.\4\ Referred 
to as a ``Kill Switch,'' the functionality will allow NOM Participants 
to remove quotes and cancel open orders, and will prevent the 
submission of new quotes and orders until the Exchange re-enables 
access to the NOM System for the Participant.\5\
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    \4\ See id.
    \5\ Orders submitted by NOM Market Makers over Ouch to Trade 
Options (``OTTO'') interface will be treated as quotes for purposes 
of this rule. See Notice, supra note 3, at 51850.
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    To use the Kill Switch, a Participant will send a message \6\ to 
the NOM System to: (i) Promptly remove quotes; and/or (ii) promptly 
cancel orders for certain specified Identifiers (e.g., a particular 
Exchange account, port, or badge or mnemonic, or for a group of 
Identifiers).\7\ The Exchange's proposal does not allow Participants to 
remove quotes or cancel orders by symbol. The NOM System will send an 
automated message to the Participant when it has processed a Kill 
Switch request.
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    \6\ 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. See Notice, supra note 3, at note 
3.
    \7\ Permissible groups could be formed only within a single 
broker-dealer. For example, a group could include, but would not be 
limited to, all market maker accounts or all order entry ports. See 
Notice, supra note 3, at 51850.
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    The NOM Participant will be unable to enter any new quotes or 
orders using the affected Identifier(s) until the Participant makes a 
verbal request to the Exchange and Exchange staff enables re-entry. 
Once enabled for re-entry, the Exchange will send a message to the 
Participant and, if it requests to receive such notifications, to the 
Participant's clearing firm as well.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange,\8\ 
and, in particular, the requirements of Section 6 of the Act.\9\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\10\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, 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 and that the rules are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    According to the Exchange, the proposed rule change is designed to 
protect Participants in the event that the Participant encounters a 
situation, like a systems issue, for which they would like to withdraw 
temporarily from the market.\11\ The Exchange further notes that the 
proposed Kill Switch is designed to increase systemic protections and, 
in so doing, should encourage liquidity generally while removing 
impediments to market participation.\12\ To the extent that the 
Exchange's proposal provides member firms with greater control over 
their quotes and orders, and allows firms to remove quotes and cancel 
orders in an appropriate manner, then the proposal may encourage firms 
to provide liquidity on NOM and thus contribute to fair and orderly 
markets in a manner that protects the public interest, protects 
investors, and is not designed to permit unfair discrimination.
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    \11\ See Notice, supra note 3, at 51851.
    \12\ See id.
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    Further, the Commission agrees that it would be appropriate to 
notify a Participant's clearing member, at the clearing member's 
request, once a Participant's selected Identifiers are re-enabled 
following the Participant's use of the Kill Switch. Because the 
clearing member accepts financial responsibility for clearing the 
Participant's trades, notifying the applicable clearing member of a 
Participant's re-enabled Identifiers following use of the Kill Switch 
may be appropriate and help the clearing member manage the risk 
associated with the Participant's trading activity.
    The Commission notes that the Exchange represented in its proposal 
that the Kill Switch will operate consistently with a broker-dealer's 
firm quote obligations pursuant to Rule 602 of Regulation NMS,\13\ and 
that the proposal does not diminish a market-maker's obligation to 
provide continuous two-sided quotes on a daily basis under NOM 
rules.\14\ Specifically, the Exchange represents that ``any interest 
that is executable against a NOM Participant's quotes and orders that 
are received 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.'' \15\ In that respect, the Exchange 
further represented that ``[t]he 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.'' \16\ 
Based on these representations, the Commission believes that the 
proposal is designed to promote just and equitable principles of trade 
and perfect the mechanism of a free and open market.
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    \13\ See id.
    \14\ See id.
    \15\ Id.
    \16\ Id.
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    Accordingly, the Commission finds that the Exchange's proposal is 
consistent with the Act, including Section 6(b)(5) thereof, in that it 
is designed to promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NASDAQ-2015-096) be, and 
hereby is, approved.
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Robert W. Errett,
Deputy Secretary.
 [FR Doc. 2015-26327 Filed 10-15-15; 8:45 am]
 BILLING CODE 8011-01-P