81 FR 13007 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Establish a Secondary Contingency Procedure To Enable the Exchange To Report an Official Closing Price on Behalf of an Impaired Primary Listing Exchange

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 48 (March 11, 2016)

[Federal Register Volume 81, Number 48 (Friday, March 11, 2016)]
[Notices]
[Pages 13007-13010]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-05440]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77309; File No. SR-NASDAQ-2016-035]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Establish a Secondary 
Contingency Procedure To Enable the Exchange To Report an Official 
Closing Price on Behalf of an Impaired Primary Listing Exchange

March 7, 2016.
    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 March 2, 2016, 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 establish a Secondary Contingency 
Procedure that would enable the Exchange to report an Official Closing 
Price on behalf of an impaired primary listing exchange.
    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

[[Page 13008]]

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 has robust and resilient systems that are designed to ensure 
fair and orderly markets, including multiple redundancies and back-up 
systems. For the critical Nasdaq Official Closing Price (``NOCP''), 
Nasdaq currently has three systems that are designed to ensure the 
orderly execution and dissemination of the NOCP: (1) The Nasdaq Closing 
Cross set forth in Rule 4754(b)(1); Auxiliary Procedures described in 
Rule 4754(b)(5); and Contingency Procedures contained in Rule 
4754(b)(7).
    Here, Nasdaq is proposing to establish Secondary Contingency 
Procedures in proposed new Rule 4754(b)(8). This proposal is made in 
conjunction with the New York Stock Exchange LLC (``NYSE''), NYSE Arca, 
Inc., and the exclusive securities information processors for the 
Nasdaq UTP Plan and the Consolidated Quote/Consolidated Tape Plan 
(``SIPs'').
Overview of Secondary Contingency Procedures
    Procedurally, Nasdaq, as a primary listing market, will designate a 
back-up exchange to provide an official closing price in the event that 
Nasdaq's market is impaired and unable to execute a closing auction for 
all or a subset of listed securities. Nasdaq would invoke the Secondary 
Contingency Procedures by announcing publicly that its market is 
impaired and unable to execute a closing auction. If Nasdaq makes that 
announcement prior to 3:00 p.m., Eastern Standard Time (``EST''), the 
official closing price from Nasdaq's designated back-up exchange would 
serve as the NOCP. If Nasdaq makes that announcement after 3:00 p.m., 
EST, the SIP would calculate a Volume Weighted Average Price 
(``VWAP''), described in more detail below. Whether the announcement is 
made before or after 3:00 p.m., EST, the SIP would publish the NOCP on 
Nasdaq's behalf either: (1) Based on a message from Nasdaq's back-up 
exchange or (2) based on the VWAP calculation.
Designation of Back-Up Exchange
    Nasdaq proposes to designate NYSE Arca as its official back-up 
exchange. Nasdaq believes that NYSE Arca is best positioned to serve as 
Nasdaq's back-up for two primary reasons: (1) NYSE Arca and Nasdaq 
membership substantially overlaps; (2) NYSE Arca already operates an 
effective closing cross that it can use to execute a closing cross in 
Nasdaq-listed securities. In the event Nasdaq is unable to execute a 
closing cross, Nasdaq members that are also NYSE Arca members should be 
technically prepared to transfer liquidity to NYSE Arca to ensure a 
deeply liquid closing cross.
    Nasdaq expects NYSE Arca will designate Nasdaq as its back-up 
exchange for the same reasons. Again, the two exchanges' memberships 
substantially overlap, meaning that liquidity can and already does flow 
smoothly from one exchange to the other. Also, Nasdaq already operates 
a closing cross for securities listed on NYSE Arca, as well as all 
other securities for which consolidated information is disseminated via 
Tapes A and B.
The Role of the SIPs
    The Operating Committees for the Nasdaq and CQ/CT Plans have 
already voted to modify the SIPs to support this proposal. 
Specifically, each exchange that is designated as a back-up exchange 
(Nasdaq and NYSE Arca), will disseminate via the SIPs an official 
closing price in every listed security marked with the .M sale 
condition code.
    The SIPs will apply the following procedures:
    1. Each primary listing exchange would print a standardized 
Official Closing Price (``OCP''), with a sale condition `M,' in each 
security it trades, whether as primary or on a UTP basis.
    2. Each primary listing exchange would include in its rules that, 
in the event that it is impaired and cannot conduct a closing auction, 
the exchange's contingency OCP would be the OCP of a specified ``back-
up exchange'' or, if the impairment is announced after 3:00 p.m., EST, 
a VWAP calculation.
    3. In the event that a primary listing exchange publicly announces 
that it is impaired and unable to conduct a closing auction for all or 
a subset of its primary symbols, the SIP would print the primary 
listing exchange's contingency OCP as the OCP of the primary listing 
exchange, including calculation of the VWAP. The advantages of the SIP 
reprinting the contingency OCP as the OCP of the primary listing 
exchange, rather than the back-up exchange separately sending to the 
SIP its OCP as the OCP of the primary exchange are that:
    a. The SIP provides a centralized service of which each primary 
listing exchange can take advantage
    b. Participant--line validations are retained
    c. There is assurance of full symbol coverage
    d. The SIP provides a single location for future updates or 
configuration changes or new primary listing exchanges
    e. A single source and method for VWAP calculations
    ** this is so with either proposal
    4. The primary listing exchange's contingency OCP would differ 
depending on what time the impaired primary market announces that it 
will be using the closing contingency plan.
    a. If announced prior to 3:00 p.m., EST, the primary listing 
exchange's contingency OCP would be based on the following hierarchy:
    i. Official Closing Price (sale condition `M') of a pre-designated 
back-up exchange(s). An exchange that has more than 1 back-up exchange 
as part of its hierarchy of contingency OCPs, will announce publicly 
the exchange(s) that will be relied on for the contingency OCP.
    ii. If no such contingency OCP exists, then a VWAP calculated by 
the SIP of the final 5 minute regular trading session. The VWAP 
calculations would include all last sale eligible trades in the last 5 
minutes of the normal trading day, including the closing auctions 
prints of all markets.
    iii. If no last sale eligible trades printed in the last 5 minutes, 
then the consolidated last sale during regular trading hours.
    iv. If no such same day consolidated last sale eligible trades 
exist, then the primary listing exchange's prior trading day's Official 
Closing Price.
    b. If announced after 3:00 p.m., EST, the primary listing 
exchange's contingency OCP would be determined by the following 
hierarchy:
    i. Final 5 minute VWAP of regular trading session (same calculation 
as described above).
    ii. If no last sale eligible trades printed in the last 5 minutes, 
then the consolidated last sale during regular trading hours.
    iii. If no such same day consolidated last sale eligible trades 
exist, then the primary listing exchange's prior trading day's Official 
Closing Price.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \3\ in general, and furthers the

[[Page 13009]]

objectives of Section 6(b)(5) of the Act \4\ 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.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it would provide transparency in how 
the Exchange would determine the Nasdaq Official Closing Price in 
Exchange-listed securities when the Exchange is unable to conduct a 
closing transaction due to a systems or technical issue. The Exchange 
believes that the proposed amendments would remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system because the proposed determination of a Nasdaq Official Closing 
Price was crafted in response to input from industry participants and 
would:
     Provide a pre-determined, consistent solution that would 
result in a closing print to the SIP within a reasonable time frame 
from the normal closing time;
     minimize the need for industry participants to modify 
their processing of data from the SIP; and
     provide advance notification of the applicable closing 
contingency plan to provide sufficient time for industry participants 
to route any closing interest to an alternate venue to participate in 
that venue's closing auction.
    More specifically, the Exchange believes the proposed hierarchy for 
determining the Nasdaq Official Closing Price if the Exchange 
determines that it is impaired before 3:00 p.m., EST, would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because the proposal, which is based on input 
from market participants, would provide sufficient time for market 
participants to direct closing-only interest to a designated alternate 
exchange in time for such interest to participate in a closing auction 
on such alternate venue in a meaningful manner.
    The Exchange further believes that relying on the official closing 
price of a designated alternate exchange would provide for an 
established hierarchy for determining an Official Closing Price for an 
Exchange-listed security if there is insufficient interest to conduct a 
closing auction on the alternate exchange. In such case, the rules of 
NYSE Arca and Nasdaq already provide a mechanism for determining an 
official closing price for securities that trade on those markets.
    The Exchange further believes that if the Exchange determines after 
3:00 p.m., EST, that it is impaired and unable the conduct a closing 
transaction, the proposed VWAP calculation would remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system because it would provide for a mechanism to determine the 
value of an affected security for purposes of determining a Nasdaq 
Official Closing Price. By using a volume-weighted calculation that 
would include the closing transactions on an affected security on 
alternate exchanges as well as any busts or corrections that were 
reported up to the time that the SIP calculates the value, the Exchange 
believes that the proposed calculation would reflect the correct price 
of a security. In addition, by using a VWAP calculation rather than the 
last consolidated last-sale eligible price as of the end of regular 
trading hours, the Exchange would reduce the potential for an anomalous 
trade that may not reflect the true price of a security from being set 
as the Nasdaq Official Closing Price for a security.
    The Exchange further believes that the proposed rule change would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because the proposal would have 
minimal impact on market participants. As proposed, from the 
perspective of market participants, even if the Exchange were impaired, 
the SIP would publish a Nasdaq Official Closing Price for Exchange-
listed securities on behalf of the Exchange in a manner that would be 
no different than if the Exchange were not impaired. If the Exchange 
determines that it is impaired after 3:00 p.m., market participants 
would not have to make any system changes. If the Exchange determines 
that it is impaired before 3:00 p.m., EST, and designates an alternate 
exchange, market participants may have to do systems work to re-direct 
closing-only orders to the alternate exchange. However, the Exchange 
understands, based on input from market participants, that such changes 
would be feasible based on the amount of advance notice.
    In addition, the Exchange believes that designating an alternate 
exchange when there is sufficient time to do so would remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it would allow for the price-discovery 
mechanism of a closing auction to be available for impacted Exchange-
listed securities

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 proposed rule change is not 
designed to address any competitive issues, but rather to provide for 
how the Exchange would determine an Official Closing Price for 
Exchange-listed securities if it is impaired and cannot conduct a 
closing transaction due to a systems or technical issue. The proposal 
has been crafted with input from market participants, Nasdaq, and the 
SIPs, and is designed to reduce the burden on competition by having 
similar back-up procedures across all primary listing exchanges if such 
exchange is impaired and cannot conduct a closing transaction.

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-2016-035 on the subject line.

[[Page 13010]]

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-2016-035. 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-2016-035 and should 
be submitted on or before April 1, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-05440 Filed 3-10-16; 8:45 am]
 BILLING CODE 8011-01-P