80 FR 74175 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Market Order Spread Protection

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 228 (November 27, 2015)

[Federal Register Volume 80, Number 228 (Friday, November 27, 2015)]
[Notices]
[Pages 74175-74177]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-30088]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76499; File No. SR-NASDAQ-2015-142]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Market Order Spread Protection

November 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 November 12, 2015, 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, 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 the rules of the NASDAQ Options 
Market, LLC (``NOM''), NASDAQ's facility for executing and routing 
standardized equity and index options, at Chapter VI, Section 6, 
entitled ``Acceptance of Quotes and Orders,'' specifically at Section 
6(c) concerning Market Order Spread 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 this filing is to amend Chapter VI, Section 6 
entitled ``Acceptance of Quotes and Orders,'' specifically, at 
paragraph (c) related to Market Order Spread Protection. This feature 
was adopted as an enhancement to NOM's Systems in 2011.\3\ The Market 
Order Spread Protection was designed to protect Market Orders \4\ from 
being executed in very wide markets. This feature is not optional and 
is set at the same threshold for all options traded on NOM. The Market 
Order Spread Protection is applicable to all Participants submitting 
Market Orders.
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    \3\ See Securities Exchange Act Release No. 64667 (June 14, 
2011), 76 FR 35930 (June 20, 2011) (SR-NASDAQ-2011-080).
    \4\ ``Market Orders'' are orders to buy or sell at the best 
price available at the time of execution. Participants can designate 
that their Market Orders not executed after a pre-established period 
of time, as established by the Exchange, will be cancelled back to 
the Participant. See NOM Rules at Chapter VI, Section 1(e)(5).
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    At this time, the Exchange is proposing to amend Section 6(c) which 
currently states, ``System Orders that are Market Orders will be 
rejected if the NBBO is wider than a preset threshold at the time the 
order is received by the System.'' The Exchange proposes to amend this 
sentence as follows: ``System Orders that are Market Orders will be 
rejected if the best of the NBBO and the internal market BBO \5\ (the 
``Reference BBO'') is wider than a preset threshold at the time the 
order is received by the System.'' The Exchange is amending this rule 
text to account for both Price-Improving \6\ and Post-Only Orders.\7\ 
Both of these order types, as well as orders which would lock or cross 
another market,\8\ could result in non-displayed pricing and would 
result

[[Page 74176]]

in the internal market BBO being better than the NBBO.
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    \5\ Best Bid or Best Offer on NOM.
    \6\ See NOM Rules at Chapter VI, Section 1(e)(6).
    \7\ See NOM Rules at Chapter VI, Section 1(e)(11).
    \8\ Options Order Protection and Locked and Crossed Market Rules 
are located in Chapter XII of NOM Rules. In the event of a locked 
and crossed market, the BBO will be repriced and displayed in 
accordance with NOM Rules at Chapter VI, Section 7(b)(3)(C).
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    Price Improving Orders are orders to buy or sell an option at a 
specified price at an increment smaller than the minimum price 
variation (``MPV'') 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.
    Post-Only Orders are orders that will not remove liquidity from the 
System. Post-Only Orders are to be ranked and executed on the Exchange 
or cancelled, as appropriate, without routing away to another market. 
Post-Only Orders are evaluated at the time of entry with respect to 
locking or crossing other orders as follows: (i) If a Post-Only Order 
would lock or cross an order on the System, the order will be re-priced 
to $.01 below the current low offer (for bids) or above the current 
best bid (for offers) and displayed by the System at one minimum price 
increment below the current low offer (for bids) or above the current 
best bid (for offers); and (ii) if a Post-Only Order would not lock or 
cross an order on the System but would lock or cross the NBBO as 
reflected in the protected quotation of another market center, the 
order will be handled pursuant to Chapter VI, Section 7(b)(3)(C). 
Participants may choose to have their Post-Only Orders returned 
whenever the order would lock or cross the NBBO or be placed on the 
book at a price other than its limit price. Post-Only Orders received 
prior to the opening will be eligible for execution during the opening 
cross and will be processed as per Chapter VI, Section 8. Post-Only 
Orders received after market close will be rejected.\9\ Similarly, with 
this order type, market participants are able to submit orders or 
quotes priced between the MPV.
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    \9\ Post-Only Orders may not have a time-in-force designation of 
Good Til Cancelled or Immediate or Cancel.
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    The current rule text does not reflect the possibility that orders 
or quotes could be priced between the MPV. The proposed rule text 
amends the current rule text to account for Price Improving and Post-
Only Orders and the results of repricing.
    The following is an example of a Price Improving Order and Market 
Order Spread Protection. Assume an option MPV is scaled in $0.05 
increments and a limit buy order of $0.05 exists on the Exchange. If a 
Price Improving sell order is entered at $0.11, this order will not be 
displayed at its limit of $0.11, because the order is priced at a non-
MPV increment. This order will be displayed at the nearest MPV price of 
$0.15 (because of the option's $0.05 MPV increment). Assume this order 
makes up the best offer on the Exchange. For this example, assume the 
Market Order Spread Threshold in the System is set at $0.09. Further 
assume a Market Order to buy is submitted to the Exchange. Based on the 
Exchange's proposed implementation of Market Order Spread Protection, 
the Market Order to buy would execute against the resting sell order at 
$0.11, since $0.11 is the best available offer and the internal market 
BBO spread is $0.06 (spread between the best bid of $0.05 and the best 
offer of $0.11) which is less than the Market Order Spread Threshold of 
$0.09. Based on the current rule text, a Participant could expect their 
Market Order to be rejected, since the NBBO spread is $0.10 (spread 
between the best NBB of $0.05 and the NBO of $0.15) which exceeds the 
$0.09 Market Order Spread Threshold. The Exchange is amending the rule 
text to provide for the internal market BBO being better than the NBBO.
    The following is a similar example for a Post-Only Order. Assume an 
option MPV is scaled in $0.05 increments and a limit buy order of $0.05 
exists on the Exchange. If a Post-Only Order is entered to sell at 
$0.05, this order will not immediately trade at its limit of $0.05 
since by definition it will not remove liquidity from the System. 
Instead, the Post-Only Order will be available to trade $0.01 above the 
locking price of $0.05 (i.e., $0.06) and displayed at the nearest MPV 
increment price of $0.10. Assume this order makes up the best offer on 
the Exchange. For this example, assume the Market Order Spread 
Threshold in the System is set at $0.04. Further assume a Market Order 
to buy is submitted to the Exchange. Based on the Exchange's proposed 
implementation of Market Order Spread Protection, the Market Order to 
buy would execute against the resting Post-Only Order at $0.06, since 
$0.06 is the best available offer and the internal market BBO spread is 
$0.01 (spread between the best bid of $0.05 and the best offer of 
$0.06) which is less than the Market Order Spread Threshold of $0.04. 
Based on the current rule text, a Participant could expect their Market 
Order to be rejected, since the NBBO spread is $0.05 (spread between 
the best NBB of $0.05 and the NBO of $0.10) which exceeds the $0.04 
Market Order Spread Threshold.
    This rule change will correct the existing rule text to reflect 
current practice which accounts for non-displayed order types and 
reprices due to trade-through and locked and crossed market 
restrictions.\10\ Participants were notified via an Options Trader 
Alert of this rule text error.\11\
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    \10\ See Chapter XII of NOM Rules.
    \11\ See Options Regulatory Alert 2015-28 dated September 4, 
2015.
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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 amending the rule text to reflect the impact of non-
displayed order types and repricing due to trade-through and locked and 
crossed market restrictions.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Amending the current NOM rule text for Market Order Spread 
Protection to account for non-displayed orders such as Price-Improving 
and Post-Only Orders and repricing due to trade-through and locked and 
crossed market restrictions would provide Participants with the 
expected results of the Market Order Spread Protection feature. The 
Exchange believes that it is consistent with the Act to amend the rule 
text to reflect these non-displayed orders because today, these orders 
types permit Participants to submit orders or quotes priced between the 
MPV, which will be rounded to the nearest MPV for display.
    The Exchange believes that the amendment to the Market Order Spread 
Protection language does not otherwise create an impediment to a free 
and open market because these two order types already exist today and 
provide investors the opportunity to trade at a better price than would 
otherwise be available, e.g. inside the disseminated best bid and offer 
for a security, which could result in better executions for investors. 
Further, these order types incent Participants to compete by putting 
forth their best price to potentially match or better any Price 
Improving or Post-Only Orders or any other order resident in the 
System. This may result in more aggressive, rather than less 
aggressive, trading interest. This proposal reflects the impact of 
these order types on the Market Order Spread Protection feature.
    By reflecting the proper rule text to account for these order types 
the

[[Page 74177]]

Exchange is providing Participants with additional information with 
which to anticipate the impact of the Market Order Spread Protection 
feature.

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 Exchange does not believe 
that the proposal to amend the Market Order Spread Protection rule text 
to account for Price Improving or Post-Only Orders or repricing due to 
trade-through and locked and crossed market restrictions creates an 
undue burden on competition because it will serve to provide 
Participants with greater information to anticipate the impact of the 
Market Order Spread Protection feature. Today, Participants are able to 
submit orders or quotes priced between the MPV for display at the 
nearest MPV. This rule change would reflect the ability to enter these 
types of orders on NOM and the impact of the Market Order Spread 
Protection feature. The purpose of this rule change is to protect 
orders resting on the Order Book when the market is wide. This feature 
will be applied in a similar manner to all Participants on NOM.

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)(iii) of the Act \14\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \15\ 17 CFR 240.19b-4(f)(6). 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 [email protected]. Please include 
File Number SR-NASDAQ-2015-142 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-2015-142. 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-2015-142 and should 
be submitted on or before December 18, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-30088 Filed 11-25-15; 8:45 am]
 BILLING CODE 8011-01-P