81_FR_44479 81 FR 44349 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Professionals Order Counting

81 FR 44349 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Professionals Order Counting

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 130 (July 7, 2016)

Page Range44349-44353
FR Document2016-16027

Federal Register, Volume 81 Issue 130 (Thursday, July 7, 2016)
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)]
[Notices]
[Pages 44349-44353]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-16027]



[[Page 44349]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78200; File No. SR-NASDAQ-2016-091]


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

June 30, 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 June 17, 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 and II, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the NASDAQ Options Market LLC 
(``NOM'') Rules at Chapter I, Section 1, entitled ``Definitions,'' to 
add specificity to the definition of a Professional with respect to the 
manner in which the volume threshold will be calculated by the 
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 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 Exchange proposes to amend the definition of ``Professional'' 
at Chapter I, Section 1(49) to specify the manner in which the Exchange 
calculates orders to determine if an order should be treated as 
Professional.
Background
    The definition of the term Professional at Chapter I, Section 
1(48), currently states, ``any person or entity that (i) is not a 
broker or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its own 
beneficial account(s).'' In order to properly represent orders entered 
on the Exchange Participants are required to indicate whether Public 
Customer \3\ orders are ``Professional'' orders.'' \4\ To comply with 
this requirement, Participants are required to review their Public 
Customers' activity on at least a quarterly basis to determine whether 
orders that are not for the account of a broker-dealer should be 
represented as Public Customer orders or Professional orders.\5\
---------------------------------------------------------------------------

    \3\ The term ``Public Customer'' means a person that is not a 
broker or dealer in securities. See Chapter I, Section 1(49).
    \4\ The Exchange utilizes a special order origin code for 
Professional orders.
    \5\ Orders for any Public Customer that had an average of more 
than 390 orders per day during any month of a calendar quarter must 
be represented as Professional orders for the next calendar quarter. 
Members are required to conduct a quarterly review and make any 
appropriate changes to the way in which they are representing orders 
within five days after the end of each calendar quarter. While 
members are only required to review their accounts on a quarterly 
basis, if during a quarter the Exchange identifies a Public Customer 
for which orders are being represented as Public Customer orders but 
that has averaged more than 390 orders per day during a month, the 
Exchange will notify the member and the member will be required to 
change the manner in which it is representing the Public Customer's 
orders within five days.
---------------------------------------------------------------------------

    The Exchange accepts orders routed from other markets that are 
marked Professional. The designation of Professional or Professional 
order does not result in any different treatment of such orders for 
purposes of Exchange rules concerning away market protection. That is, 
all non-broker or dealer orders, including those that meet the 
definition of Professional orders, are treated equally for purposes of 
Exchange away market protection rules.\6\ The Exchange continues to 
believe that identifying Professional accounts based upon the average 
number of orders entered in qualified accounts is an appropriately 
objective approach to reasonably distinguish such persons and entities 
from retail investors or market participants.
---------------------------------------------------------------------------

    \6\ See Exchange Rules at Chapter VI, Section 11, Chapter XII, 
Sections 2 and 3.
---------------------------------------------------------------------------

Proposal
    The Exchange proposes to count each order entered by a Professional 
toward the number of orders, regardless of the options exchange to 
which the order was routed in determining Professional orders.\7\
---------------------------------------------------------------------------

    \7\ All order types count toward the 390 orders on average per 
day.
---------------------------------------------------------------------------

Cancel and Replace
    A cancel and replace order is a type of order that replaces a prior 
order. The Exchange believes that the second order (the replacement 
order) should be counted as a new order. With respect to ``single-
strike algorithms,'' which are a series of cancel and replace orders in 
an individual strike which track the NBBO, these orders shall be 
counted as new orders.\8\ The Exchange believes that because the Public 
Customer is specifically instructing the executing broker in the 
``single-strike algorithm'' scenario to cancel and replace these 
orders. This type of activity is akin to market making in a Public 
Customer account and should be counted, as a new order.
---------------------------------------------------------------------------

    \8\ Cancel messages do not count as an order.
---------------------------------------------------------------------------

Parent/Child Orders
    An order that converts into multiple subordinate orders to achieve 
an execution strategy \9\ shall be counted as one order per side and 
series, even if the order is routed away. An order that cancels and 
replaces a resulting subordinate order and results in multiple sides/
series shall be counted as a new order on each side and series. For 
purposes of counting Public Customer orders, the manner in which the 
Public Customer submitted the order and whether the order was on the 
same side and series will determine if the order will count as one 
order. If one Public Customer order on the same side and series is 
subsequently broken-up by a broker into multiple orders for purposes of 
execution or routed away, this order will count as one order. The 
Exchange believes that the proposed amendment will provide more 
certainty to market participants in determining the manner in which the 
Exchange will compute the

[[Page 44350]]

number of orders in listed options per day on average during a calendar 
month for its own beneficial account(s) to determine the Professional 
designation.
---------------------------------------------------------------------------

    \9\ An order which is placed for the beneficial account(s) of a 
person or entity that is not a broker or dealer in securities that 
is broken into multiple parts by a broker or dealer or by an 
algorithm housed at a broker or dealer or by an algorithm licensed 
from a broker or dealer. Strategies include volatility orders, for 
example.
---------------------------------------------------------------------------

    In order to make clear when orders will count as new orders, the 
Exchange offers the following scenarios as examples.
     The Exchange proposes to count multiple orders that were 
submitted by the member as separate orders as multiple orders.
     The Exchange proposes to count a single order submitted by 
a member, which was automatically executed in multiple parts by the 
trading system, as one order, because the member did not intervene to 
create multiple orders. Another example is where an order was entered 
in the trading system and only partially filled, the order would count 
as one order. The subsequent fills, which could be multiple executions, 
would not count as additional orders in determining the 390 limit. The 
manner in which the order is ultimately executed, as one order or 
multiple orders, should not itself determine whether the activity is 
that of a Professional; also the member did not intervene in that 
circumstance.
     The Exchange proposes to not count an order which 
reprices, for example because of a locked and crossed market, as a new 
order because the member did not intervene.
     The Exchange proposes to count orders, which result in 
multiple orders due to cancel and replacement orders, as new orders. 
This is because in this situation the member did intervene to create 
the subsequent orders.
     The Exchange proposes to count an order submitted by the 
Public Customer as a single order, on the same side and series, as a 
single order despite the fact that a broker broke-up the order into 
multiple orders for purposes of execution.
    The Exchange notes that other options exchanges have issued notices 
which describe the manner in which those Exchanges believe thresholds 
should be computed for determining if an order qualifies as a 
Professional order.\10\ The Exchange believes that there is industry 
confusion as to which orders count toward the 390 contract threshold. 
The Exchange's proposal is intended to provide clarity and to continue 
to promote consistency in the treatment of orders as Professional 
orders.
---------------------------------------------------------------------------

    \10\ See NYSE Arca, Inc.'s and NYSE MKT LLC's Joint Regulatory 
Bulletin (RBO-15-03 and RBO-15-06, respectively) dated September 9, 
2015; CBOE's Regulatory Circulator (RG10-126) dated December 1, 
2010; and the International Securities Exchange LLC's Regulatory 
Information Circular (2009-179) dated June 23, 2009.
---------------------------------------------------------------------------

    Below are some examples of the calculation of Professional orders.
Example #1:
    A Public Customer has an order to buy 100 calls at a volatility 
level of 35. The order then generates a child order resulting in a 1.00 
bid for 100 options which is sent to exchange A. After the underlying 
stock price ticks up 2 cents the child order is then adjusted to 
reflect a 35 level volatility which in this case (50 delta) results in 
a 1.01 bid sent to Exchange A replacing the current 1.00 bid.
    In determining the number of orders that attribute to the 390 order 
count, in this case, because the child order is being canceled and 
replaced in the ``same series'' this would only count as one (1) order 
for purposes of Professional designation calculation.
Example #2:
    A Public Customer has an order to buy 20k Vega at a 35 volatility 
level in symbol XYZ. The order then generates 50 child orders across 
different strikes. Throughout the day those 50 orders are adjusted as 
the stock moves resulting in the replacement of child orders to the 
tune of 5 times per order (50 x 5 cancels) resulting in 250 total 
orders generated to Exchange A.
    In determining the number of orders that attribute to the 390 order 
count, in this case, because the child orders generated are across 
multiple series it would be necessary to count all 250 orders.
    In addition to the above examples, the Exchange provides the below 
chart to demonstrate the manner in which it will count orders.

------------------------------------------------------------------------
        Single strike activity              Singular         Multiple
------------------------------------------------------------------------
Public Customer order posted to 1 SRO                x   ...............
 Order Book...........................
Public Customer order posted to                      x   ...............
 Multiple SRO Order Books
 simultaneously.......................
Cancel/Replace Activity...............  ...............               x
Cancel/Replace Activity tracking NBBO.  ...............               x
------------------------------------------------------------------------

Singular--counts as a single order towards the 390 count
Multiple--each order applies towards the 390 count

    The Exchange proposes to implement this rule on July 1, 2016 to 
provide market participants with advance notice for their quarterly 
calculations. 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 \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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 promoting the consistent application of its rules by 
further defining the manner in which the Exchange will compute the 
number of orders in listed options per day on average during a calendar 
month for its own beneficial account(s) for purposes of determining the 
Professional designation. Furthermore, the Exchange believes that 
specifying the manner in which the 390 threshold will be calculated 
within its Rules will provide members with certainty and provide them 
with insight as they conduct their own quarterly reviews for purposes 
of designating orders.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that counting all orders toward the number of 
orders, regardless of the options exchange to which the order was 
routed, will promote the consistent application of its rules by making 
clear that all order types shall be counted as well as all orders for 
the purpose of determining whether the definition of Professional has 
been met.
Cancel and Replace
    With respect to determining the Professional designation, a cancel 
and replace order that replaces a prior order shall be counted as a 
second order. An order that is filled partially or in its entirety or 
is a replacement order that is automatically canceled or reduced by the 
number of contracts that were

[[Page 44351]]

executed will not count as second order because it was not 
replaced.\13\ The Exchange believes that counting the replacement order 
as a second order is consistent with Exchange Rules because the 
replacement order is viewed as a new order with its own unique 
identifier.
---------------------------------------------------------------------------

    \13\ See Exchange Rules at Chapter VI, Section 1(e)(1). Cancel-
replacement order shall mean a single message for the immediate 
cancellation of a previously received order and the replacement of 
that order with a new order with new terms and conditions. If the 
previously placed order is already filled partially or in its 
entirety, the replacement order is automatically canceled or reduced 
by the number of contracts that were executed. The replacement order 
will not retain the priority of the cancelled order except when the 
replacement order reduces the size of the order and all other terms 
and conditions are retained.
---------------------------------------------------------------------------

    The Exchange believes that counting cancel and replace orders with 
``single-strike algorithms,'' which are a series of cancel and replace 
orders in an individual strike which track the NBBO, as new orders is 
consistent with the Act because the Public Customer is specifically 
instructing the executing broker in the ``single-strike algorithm'' 
scenario to cancel and replace these orders. Tracking the NBBO \14\ is 
akin to market making on the Exchange in a Public Customer account and 
should be counted as new orders. The Exchange believes that the Public 
Customers order designation should be reserved for retail Public 
Customers.
---------------------------------------------------------------------------

    \14\ Tracking the NBBO shall mean any parent order that consumes 
any self-regulatory organization order book data feed, or the OPRA 
feed, to generate automated child orders, and move with, or follow 
the Bid or Offer of the series in question.
---------------------------------------------------------------------------

Parent/Child Orders
    The Exchange's adoption of the Professional order was to treat 
orders in listed options per day on average during a calendar month in 
his or her own beneficial account differently from Public Customer 
orders for purposes of pricing.\15\ For this reason, the Exchange is 
adopting rules concerning the computation of orders which convert into 
multiple subordinate orders for the purpose of determining the 
Professional designation. The Exchange's proposal to count multiple 
subordinate orders that achieve an execution strategy as one order per 
side and series and count an order that cancels and replaces a 
resulting subordinate order and results in multiple sides/series as a 
new order is consistent with the Act, because the Exchange is 
distinguishing where the member is actively entering orders that result 
in multiple orders and canceling and replacing orders that result in 
multiple orders versus where the member had no control of the resulting 
executions. Allowing orders on the same side of the market to be 
counted as a single order is consistent with the original intent of the 
Professional order designation. The same side of market distinction 
protects retail Public Customers. This practice is typically the type 
of transaction Public Customers execute versus a Professional trader. 
Multiple related orders resulting from a large order filled in part, or 
an order which is cancelled and replaced several times are considered 
part of a related order. The Exchange does not desire to count large 
orders filled in part as multiple orders because the member did not 
intervene in the outcome of the execution. An order that results in 
several separate and unrelated orders would be counted as multiple 
orders because the member intervened in this circumstance.
---------------------------------------------------------------------------

    \15\ See NOM Rules at Chapter VI, Section 10 and Chapter XV, 
Section 2.
---------------------------------------------------------------------------

    The Exchange believes that the proposed amendment will provide more 
certainty to market participants in determining the computation of the 
number of orders in listed options per day on average during a calendar 
month for its own beneficial account(s) to determine the Professional 
designation. The Exchange notes that other options exchanges have 
issued notices describing the manner in which they believe that 
Professional order should be counted when determining if an order 
qualifies as a Professional order.\16\ The Exchange believes that there 
is confusion as to which orders count toward the 390 contract 
threshold. The Exchange proposes to provide clarity to its Rules with 
specific guidance as to the computation of Professional orders, which 
it believes will promote consistency in the treatment of orders as 
Professional orders. The Exchange believes that this proposed guidance 
will promote consistency and permit the proper calculation of options 
orders to prevent members with high volume from receiving benefits 
reserved for Public Customer orders. The Professional designation 
focuses specifically on the number of orders generated.
---------------------------------------------------------------------------

    \16\ See NYSE Arca, Inc.'s and NYSE MKT LLC's Joint Regulatory 
Bulletin (RBO-15-03 and RBO-15-06, respectively) dated September 9, 
2015; The Chicago Board Options Exchange, Incorporated's Regulatory 
Circulator (RG10-126) dated December 1, 2010; and the International 
Securities Exchange LLC's Regulatory Information Circular (2009-179) 
dated June 23, 2009.
---------------------------------------------------------------------------

    NOM's System executes order based on Price-Time priority, however, 
a marketplace advantage afforded to Public Customer orders on the 
Exchange is that members are generally not assessed transaction fees 
for the execution of Public Customer orders. The purpose of these 
marketplace advantages is to attract retail order flow to the Exchange 
by leveling the playing field for retail investors over market 
Professionals.\17\ The Exchange believes that permitting certain types 
of orders to be counted as a single order and other types of orders to 
be counted as multiple orders is consistent with the original intent of 
the Professional designation which was to continue to provide Public 
Customer accounts with marketplace advantages and distinguish those 
accounts non-Professional retail investors from the Professionals 
accounts some non-broker-dealer individuals and entities have access to 
information and technology that enables them to Professionally trade 
listed options in the same manner as a broker or dealer in 
securities.\18\
---------------------------------------------------------------------------

    \17\ Market Professionals have access to sophisticated trading 
systems that contain functionality not available to Public 
Customers, including things such as continuously updated pricing 
models based upon real-time streaming data, access to multiple 
markets simultaneously and order and risk management tools.
    \18\ For example, some broker-dealers provided their 
Professional customers with multi-screened trading stations equipped 
with trading technology that allows the trader to monitor and place 
orders on all six options exchanges simultaneously. These trading 
stations also provide compliance filters, order managements tools, 
the ability to place orders in the underlying securities, and market 
data feeds.
---------------------------------------------------------------------------

    Finally, the proposed guidance is being issued to stem confusion as 
to the manner in which options exchanges compute the Professional order 
volume. The Exchange's Rules may be similar to notices issued by NYSE 
Arca, Inc, NYSE MKT LLC (``NYSE MKT'') and International Securities 
Exchange LLC (``ISE'').

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 because the Exchange will 
uniformly apply the rules to calculate volume on all members in 
determining Professional orders. The designation of Professional orders 
would not result in any different treatment of such orders for purposes 
of the Exchange's Rules concerning order protection or routing to away 
exchanges. Also, SIFMA supports the guidance issued by NYSE Arca and 
NYSE MKT. The guidance is being issued to stem confusion as to the 
manner in which options exchanges compute the Professional order 
volume.
    The Exchange is adopting similar counting methods the Exchange 
believes is currently being utilized by NYSE

[[Page 44352]]

MKT, NYSE ARCA and ISE related to designation of Professional orders.
Counting All Orders
    The Exchange believes that counting all orders entered by a 
Professional toward the number of orders, regardless of the options 
exchange to which the order was routed, does not create an undue burden 
on intra-market competition because this proposed rule change will be 
consistently applied to all members in determining Professional orders.
Cancel and Replace
    The Exchange believes that its application of cancel and replace 
orders does not create an undue burden on intra-market competition 
because this application is consistent with Exchange Rules, where the 
replacement order is viewed as a new order. This treatment is 
consistent with the manner in which this order type is applied today 
within the Order Book.
Parent/Child Orders
    The Exchange's treatment of subordinate orders does not create an 
undue burden on intra-market competition because allowing orders on the 
same side of the market to be counted as a single order is consistent 
with the original intent of the Professional order designation which is 
to count distinct orders and focus on the number of orders generated.
    The Exchange does not believe that the proposed rule change will 
impose an undue burden on inter-market competition because other 
exchanges have announced the intent to adopt similar guidance.\19\ The 
Exchange believes that disparate rules regarding Professional order 
designation, and a lack of uniform application of such rules, does not 
promote the best regulation and may, in fact, encourage regulatory 
arbitrage. The Exchange believes that it is therefore prudent and 
necessary to conform its rules to that of other options exchanges for 
purposes of calculating the threshold volume of orders to be designated 
as a Professional. This is particularly true where the Exchange's 
third-party routing broker-dealers are members of several exchanges 
that have rules requiring Professional order designations.
---------------------------------------------------------------------------

    \19\ See supra note 16.
---------------------------------------------------------------------------

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 \20\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\21\ A proposed rule 
change filed under Rule 19b-4(f)(6) normally does not become operative 
prior to 30 days after the date of filing.\22\ Rule 19b-4(f)(6)(iii), 
however, permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest.\23\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \21\ 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.
    \22\ 17 CFR 240.19b-4(f)(6)(iii).
    \23\ Id.
---------------------------------------------------------------------------

    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission notes that it has considered a 
substantially similar proposed rule change filed by CBOE and PHLX which 
it approved after a notice and comment period.\24\ This proposed rule 
change does not raise any new or novel issues from those considered in 
the CBOE and PHLX proposals. Based on the foregoing, the Commission 
believes that it is consistent with the protection of investors and the 
public interest to waive the 30-day operative date so that the proposal 
may take effect upon filing.\25\
---------------------------------------------------------------------------

    \24\ See Securities Exchange Act Release Nos. 77450 (March 25, 
2016) (Order Approving SR-CBOE-2016-005); 77449 (March 25, 2016), 81 
FR 18665, (March 31, 2016) (Order Approving SR-Phlx-2016-10).
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) of the Act \26\ to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 No. SR-NASDAQ-2016-091 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 No. SR-NASDAQ-2016-091. 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 such filing will also 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

[[Page 44353]]

information that you wish to make available publicly. All submissions 
should refer to File No. SR-NASDAQ-2016-091 and should be submitted on 
or before July 28, 2016.
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16027 Filed 7-6-16; 8:45 am]
 BILLING CODE 8011-01-P



                                                                                   Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices                                                     44349

                                                SECURITIES AND EXCHANGE                                     A. Self-Regulatory Organization’s                     upon the average number of orders
                                                COMMISSION                                                  Statement of the Purpose of, and                      entered in qualified accounts is an
                                                                                                            Statutory Basis for, the Proposed Rule                appropriately objective approach to
                                                [Release No. 34–78200; File No. SR–                         Change                                                reasonably distinguish such persons and
                                                NASDAQ–2016–091]
                                                                                                                                                                  entities from retail investors or market
                                                                                                            1. Purpose                                            participants.
                                                Self-Regulatory Organizations; The                             The Exchange proposes to amend the
                                                                                                            definition of ‘‘Professional’’ at Chapter I,          Proposal
                                                NASDAQ Stock Market LLC; Notice of
                                                                                                            Section 1(49) to specify the manner in                  The Exchange proposes to count each
                                                Filing and Immediate Effectiveness of                                                                             order entered by a Professional toward
                                                                                                            which the Exchange calculates orders to
                                                Proposed Rule Change Relating to                                                                                  the number of orders, regardless of the
                                                                                                            determine if an order should be treated
                                                Professionals Order Counting                                as Professional.                                      options exchange to which the order
                                                June 30, 2016.                                                                                                    was routed in determining Professional
                                                                                                            Background                                            orders.7
                                                   Pursuant to Section 19(b)(1) of the                         The definition of the term
                                                Securities Exchange Act of 1934                                                                                   Cancel and Replace
                                                                                                            Professional at Chapter I, Section 1(48),
                                                (‘‘Act’’),1 and Rule 19b–4 thereunder,2                     currently states, ‘‘any person or entity                 A cancel and replace order is a type
                                                notice is hereby given that on June 17,                     that (i) is not a broker or dealer in                 of order that replaces a prior order. The
                                                2016, The NASDAQ Stock Market LLC                           securities, and (ii) places more than 390             Exchange believes that the second order
                                                (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the                 orders in listed options per day on                   (the replacement order) should be
                                                Securities and Exchange Commission                          average during a calendar month for its               counted as a new order. With respect to
                                                (‘‘SEC’’ or ‘‘Commission’’) the proposed                    own beneficial account(s).’’ In order to              ‘‘single-strike algorithms,’’ which are a
                                                rule change as described in Items I and                     properly represent orders entered on the              series of cancel and replace orders in an
                                                II, below, which Items have been                            Exchange Participants are required to                 individual strike which track the NBBO,
                                                                                                            indicate whether Public Customer 3                    these orders shall be counted as new
                                                prepared by the Exchange. The
                                                                                                            orders are ‘‘Professional’’ orders.’’ 4 To            orders.8 The Exchange believes that
                                                Commission is publishing this notice to
                                                                                                            comply with this requirement,                         because the Public Customer is
                                                solicit comments on the proposed rule                                                                             specifically instructing the executing
                                                change from interested persons.                             Participants are required to review their
                                                                                                            Public Customers’ activity on at least a              broker in the ‘‘single-strike algorithm’’
                                                I. Self-Regulatory Organization’s                           quarterly basis to determine whether                  scenario to cancel and replace these
                                                Statement of the Terms of Substance of                      orders that are not for the account of a              orders. This type of activity is akin to
                                                the Proposed Rule Change                                    broker-dealer should be represented as                market making in a Public Customer
                                                                                                            Public Customer orders or Professional                account and should be counted, as a
                                                   The Exchange proposes to amend the                       orders.5                                              new order.
                                                NASDAQ Options Market LLC (‘‘NOM’’)                            The Exchange accepts orders routed                 Parent/Child Orders
                                                Rules at Chapter I, Section 1, entitled                     from other markets that are marked
                                                ‘‘Definitions,’’ to add specificity to the                  Professional. The designation of                        An order that converts into multiple
                                                definition of a Professional with respect                   Professional or Professional order does               subordinate orders to achieve an
                                                                                                            not result in any different treatment of              execution strategy 9 shall be counted as
                                                to the manner in which the volume
                                                                                                            such orders for purposes of Exchange                  one order per side and series, even if the
                                                threshold will be calculated by the                                                                               order is routed away. An order that
                                                Exchange.                                                   rules concerning away market
                                                                                                                                                                  cancels and replaces a resulting
                                                                                                            protection. That is, all non-broker or
                                                   The text of the proposed rule change                                                                           subordinate order and results in
                                                                                                            dealer orders, including those that meet
                                                is available on the Exchange’s Web site                                                                           multiple sides/series shall be counted as
                                                                                                            the definition of Professional orders, are
                                                at http://nasdaq.cchwallstreet.com, at                                                                            a new order on each side and series. For
                                                                                                            treated equally for purposes of Exchange
                                                the principal office of the Exchange, and                                                                         purposes of counting Public Customer
                                                                                                            away market protection rules.6 The
                                                at the Commission’s Public Reference                                                                              orders, the manner in which the Public
                                                                                                            Exchange continues to believe that
                                                Room.                                                                                                             Customer submitted the order and
                                                                                                            identifying Professional accounts based
                                                                                                                                                                  whether the order was on the same side
                                                II. Self-Regulatory Organization’s                                                                                and series will determine if the order
                                                                                                               3 The term ‘‘Public Customer’’ means a person
                                                Statement of the Purpose of, and                                                                                  will count as one order. If one Public
                                                                                                            that is not a broker or dealer in securities. See
                                                Statutory Basis for, the Proposed Rule                      Chapter I, Section 1(49).                             Customer order on the same side and
                                                Change                                                         4 The Exchange utilizes a special order origin     series is subsequently broken-up by a
                                                                                                            code for Professional orders.                         broker into multiple orders for purposes
                                                  In its filing with the Commission, the                       5 Orders for any Public Customer that had an
                                                                                                                                                                  of execution or routed away, this order
                                                Exchange included statements                                average of more than 390 orders per day during any
                                                                                                            month of a calendar quarter must be represented as
                                                                                                                                                                  will count as one order. The Exchange
                                                concerning the purpose of and basis for                     Professional orders for the next calendar quarter.    believes that the proposed amendment
                                                the proposed rule change and discussed                      Members are required to conduct a quarterly review    will provide more certainty to market
                                                any comments it received on the                             and make any appropriate changes to the way in        participants in determining the manner
                                                proposed rule change. The text of these                     which they are representing orders within five days
                                                                                                            after the end of each calendar quarter. While
                                                                                                                                                                  in which the Exchange will compute the
                                                statements may be examined at the                           members are only required to review their accounts
                                                places specified in Item IV below. The                      on a quarterly basis, if during a quarter the            7 All order types count toward the 390 orders on
srobinson on DSK5SPTVN1PROD with NOTICES




                                                Exchange has prepared summaries, set                        Exchange identifies a Public Customer for which       average per day.
                                                                                                            orders are being represented as Public Customer          8 Cancel messages do not count as an order.
                                                forth in sections A, B, and C below, of                     orders but that has averaged more than 390 orders        9 An order which is placed for the beneficial
                                                the most significant aspects of such                        per day during a month, the Exchange will notify      account(s) of a person or entity that is not a broker
                                                statements.                                                 the member and the member will be required to         or dealer in securities that is broken into multiple
                                                                                                            change the manner in which it is representing the     parts by a broker or dealer or by an algorithm
                                                                                                            Public Customer’s orders within five days.            housed at a broker or dealer or by an algorithm
                                                  1 15   U.S.C. 78s(b)(1).                                     6 See Exchange Rules at Chapter VI, Section 11,    licensed from a broker or dealer. Strategies include
                                                  2 17   CFR 240.19b–4.                                     Chapter XII, Sections 2 and 3.                        volatility orders, for example.



                                           VerDate Sep<11>2014      17:23 Jul 06, 2016   Jkt 238001   PO 00000   Frm 00092   Fmt 4703   Sfmt 4703   E:\FR\FM\07JYN1.SGM   07JYN1


                                                44350                                    Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices

                                                number of orders in listed options per                                     • The Exchange proposes to count                                      the child order is then adjusted to
                                                day on average during a calendar month                                  orders, which result in multiple orders                                  reflect a 35 level volatility which in this
                                                for its own beneficial account(s) to                                    due to cancel and replacement orders,                                    case (50 delta) results in a 1.01 bid sent
                                                determine the Professional designation.                                 as new orders. This is because in this                                   to Exchange A replacing the current
                                                  In order to make clear when orders                                    situation the member did intervene to                                    1.00 bid.
                                                will count as new orders, the Exchange                                  create the subsequent orders.                                               In determining the number of orders
                                                offers the following scenarios as                                          • The Exchange proposes to count an
                                                                                                                                                                                                 that attribute to the 390 order count, in
                                                examples.                                                               order submitted by the Public Customer
                                                  • The Exchange proposes to count                                                                                                               this case, because the child order is
                                                                                                                        as a single order, on the same side and
                                                multiple orders that were submitted by                                                                                                           being canceled and replaced in the
                                                                                                                        series, as a single order despite the fact
                                                the member as separate orders as                                        that a broker broke-up the order into                                    ‘‘same series’’ this would only count as
                                                multiple orders.                                                        multiple orders for purposes of                                          one (1) order for purposes of
                                                  • The Exchange proposes to count a                                    execution.                                                               Professional designation calculation.
                                                single order submitted by a member,                                        The Exchange notes that other options                                 Example #2:
                                                which was automatically executed in                                     exchanges have issued notices which
                                                multiple parts by the trading system, as                                describe the manner in which those                                         A Public Customer has an order to
                                                one order, because the member did not                                   Exchanges believe thresholds should be                                   buy 20k Vega at a 35 volatility level in
                                                intervene to create multiple orders.                                    computed for determining if an order                                     symbol XYZ. The order then generates
                                                Another example is where an order was                                   qualifies as a Professional order.10 The                                 50 child orders across different strikes.
                                                entered in the trading system and only                                  Exchange believes that there is industry                                 Throughout the day those 50 orders are
                                                partially filled, the order would count as                              confusion as to which orders count                                       adjusted as the stock moves resulting in
                                                one order. The subsequent fills, which                                  toward the 390 contract threshold. The                                   the replacement of child orders to the
                                                could be multiple executions, would not                                 Exchange’s proposal is intended to                                       tune of 5 times per order (50 x 5
                                                count as additional orders in                                           provide clarity and to continue to                                       cancels) resulting in 250 total orders
                                                determining the 390 limit. The manner                                   promote consistency in the treatment of                                  generated to Exchange A.
                                                in which the order is ultimately                                        orders as Professional orders.
                                                executed, as one order or multiple                                                                                                                 In determining the number of orders
                                                                                                                           Below are some examples of the
                                                orders, should not itself determine                                                                                                              that attribute to the 390 order count, in
                                                                                                                        calculation of Professional orders.
                                                whether the activity is that of a                                                                                                                this case, because the child orders
                                                Professional; also the member did not                                   Example #1:                                                              generated are across multiple series it
                                                intervene in that circumstance.                                           A Public Customer has an order to                                      would be necessary to count all 250
                                                  • The Exchange proposes to not count                                  buy 100 calls at a volatility level of 35.                               orders.
                                                an order which reprices, for example                                    The order then generates a child order                                     In addition to the above examples, the
                                                because of a locked and crossed market,                                 resulting in a 1.00 bid for 100 options                                  Exchange provides the below chart to
                                                as a new order because the member did                                   which is sent to exchange A. After the                                   demonstrate the manner in which it will
                                                not intervene.                                                          underlying stock price ticks up 2 cents                                  count orders.

                                                                                                                  Single strike activity                                                                                   Singular                   Multiple

                                                Public Customer order posted to 1 SRO Order Book .............................................................................................                                   x               ........................
                                                Public Customer order posted to Multiple SRO Order Books simultaneously .......................................................                                                  x               ........................
                                                Cancel/Replace Activity ...........................................................................................................................................   ........................              x
                                                Cancel/Replace Activity tracking NBBO ..................................................................................................................              ........................              x



                                                Singular—counts as a single order                                       perfect the mechanism of a free and                                         The Exchange believes that counting
                                                  towards the 390 count                                                 open market and a national market                                        all orders toward the number of orders,
                                                Multiple—each order applies towards                                     system, and, in general to protect                                       regardless of the options exchange to
                                                  the 390 count                                                         investors and the public interest, by                                    which the order was routed, will
                                                  The Exchange proposes to implement                                    promoting the consistent application of                                  promote the consistent application of its
                                                this rule on July 1, 2016 to provide                                    its rules by further defining the manner                                 rules by making clear that all order
                                                market participants with advance notice                                 in which the Exchange will compute the                                   types shall be counted as well as all
                                                for their quarterly calculations. The                                   number of orders in listed options per                                   orders for the purpose of determining
                                                Exchange will issue an Options Trader                                   day on average during a calendar month                                   whether the definition of Professional
                                                Alert in advance to inform market                                       for its own beneficial account(s) for                                    has been met.
                                                participants of such date.                                              purposes of determining the                                              Cancel and Replace
                                                2. Statutory Basis                                                      Professional designation. Furthermore,
                                                                                                                                                                                                   With respect to determining the
                                                   The Exchange believes that its                                       the Exchange believes that specifying                                    Professional designation, a cancel and
                                                proposal is consistent with Section 6(b)                                the manner in which the 390 threshold                                    replace order that replaces a prior order
                                                of the Act 11 in general, and furthers the                              will be calculated within its Rules will                                 shall be counted as a second order. An
                                                objectives of Section 6(b)(5) of the Act 12                             provide members with certainty and                                       order that is filled partially or in its
srobinson on DSK5SPTVN1PROD with NOTICES




                                                in particular, in that it is designed to                                provide them with insight as they                                        entirety or is a replacement order that is
                                                promote just and equitable principles of                                conduct their own quarterly reviews for                                  automatically canceled or reduced by
                                                trade, to remove impediments to and                                     purposes of designating orders.                                          the number of contracts that were
                                                  10 See NYSE Arca, Inc.’s and NYSE MKT LLC’s                           December 1, 2010; and the International Securities                         11 15   U.S.C. 78f(b).
                                                Joint Regulatory Bulletin (RBO–15–03 and RBO–                           Exchange LLC’s Regulatory Information Circular                             12 15   U.S.C. 78f(b)(5).
                                                15–06, respectively) dated September 9, 2015;                           (2009–179) dated June 23, 2009.
                                                CBOE’s Regulatory Circulator (RG10–126) dated



                                           VerDate Sep<11>2014        17:23 Jul 06, 2016       Jkt 238001      PO 00000       Frm 00093      Fmt 4703       Sfmt 4703      E:\FR\FM\07JYN1.SGM             07JYN1


                                                                                Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices                                                   44351

                                                executed will not count as second order                  member had no control of the resulting                execution of Public Customer orders.
                                                because it was not replaced.13 The                       executions. Allowing orders on the                    The purpose of these marketplace
                                                Exchange believes that counting the                      same side of the market to be counted                 advantages is to attract retail order flow
                                                replacement order as a second order is                   as a single order is consistent with the              to the Exchange by leveling the playing
                                                consistent with Exchange Rules because                   original intent of the Professional order             field for retail investors over market
                                                the replacement order is viewed as a                     designation. The same side of market                  Professionals.17 The Exchange believes
                                                new order with its own unique                            distinction protects retail Public                    that permitting certain types of orders to
                                                identifier.                                              Customers. This practice is typically the             be counted as a single order and other
                                                   The Exchange believes that counting                   type of transaction Public Customers                  types of orders to be counted as
                                                cancel and replace orders with ‘‘single-                 execute versus a Professional trader.                 multiple orders is consistent with the
                                                strike algorithms,’’ which are a series of               Multiple related orders resulting from a              original intent of the Professional
                                                cancel and replace orders in an                          large order filled in part, or an order               designation which was to continue to
                                                individual strike which track the NBBO,                  which is cancelled and replaced several               provide Public Customer accounts with
                                                as new orders is consistent with the Act                 times are considered part of a related                marketplace advantages and distinguish
                                                because the Public Customer is                           order. The Exchange does not desire to                those accounts non-Professional retail
                                                specifically instructing the executing                   count large orders filled in part as                  investors from the Professionals
                                                broker in the ‘‘single-strike algorithm’’                multiple orders because the member did                accounts some non-broker-dealer
                                                scenario to cancel and replace these                     not intervene in the outcome of the                   individuals and entities have access to
                                                orders. Tracking the NBBO 14 is akin to                  execution. An order that results in                   information and technology that enables
                                                market making on the Exchange in a                       several separate and unrelated orders                 them to Professionally trade listed
                                                Public Customer account and should be                    would be counted as multiple orders                   options in the same manner as a broker
                                                counted as new orders. The Exchange                      because the member intervened in this                 or dealer in securities.18
                                                believes that the Public Customers order                 circumstance.                                            Finally, the proposed guidance is
                                                designation should be reserved for retail                   The Exchange believes that the                     being issued to stem confusion as to the
                                                Public Customers.                                        proposed amendment will provide more                  manner in which options exchanges
                                                                                                         certainty to market participants in                   compute the Professional order volume.
                                                Parent/Child Orders
                                                                                                         determining the computation of the                    The Exchange’s Rules may be similar to
                                                   The Exchange’s adoption of the                        number of orders in listed options per                notices issued by NYSE Arca, Inc, NYSE
                                                Professional order was to treat orders in                day on average during a calendar month                MKT LLC (‘‘NYSE MKT’’) and
                                                listed options per day on average during                 for its own beneficial account(s) to                  International Securities Exchange LLC
                                                a calendar month in his or her own                       determine the Professional designation.               (‘‘ISE’’).
                                                beneficial account differently from                      The Exchange notes that other options
                                                Public Customer orders for purposes of                                                                         B. Self-Regulatory Organization’s
                                                                                                         exchanges have issued notices                         Statement on Burden on Competition
                                                pricing.15 For this reason, the Exchange                 describing the manner in which they
                                                is adopting rules concerning the                         believe that Professional order should                   The Exchange does not believe that
                                                computation of orders which convert                      be counted when determining if an                     the proposed rule change will impose
                                                into multiple subordinate orders for the                 order qualifies as a Professional order.16            any burden on competition not
                                                purpose of determining the Professional                  The Exchange believes that there is                   necessary or appropriate in furtherance
                                                designation. The Exchange’s proposal to                  confusion as to which orders count                    of the purposes of the Act because the
                                                count multiple subordinate orders that                   toward the 390 contract threshold. The                Exchange will uniformly apply the rules
                                                achieve an execution strategy as one                     Exchange proposes to provide clarity to               to calculate volume on all members in
                                                order per side and series and count an                   its Rules with specific guidance as to                determining Professional orders. The
                                                order that cancels and replaces a                        the computation of Professional orders,               designation of Professional orders
                                                resulting subordinate order and results                  which it believes will promote                        would not result in any different
                                                in multiple sides/series as a new order                  consistency in the treatment of orders as             treatment of such orders for purposes of
                                                is consistent with the Act, because the                  Professional orders. The Exchange                     the Exchange’s Rules concerning order
                                                Exchange is distinguishing where the                     believes that this proposed guidance                  protection or routing to away exchanges.
                                                member is actively entering orders that                  will promote consistency and permit the               Also, SIFMA supports the guidance
                                                result in multiple orders and canceling                  proper calculation of options orders to               issued by NYSE Arca and NYSE MKT.
                                                and replacing orders that result in                                                                            The guidance is being issued to stem
                                                                                                         prevent members with high volume
                                                multiple orders versus where the                                                                               confusion as to the manner in which
                                                                                                         from receiving benefits reserved for
                                                                                                                                                               options exchanges compute the
                                                                                                         Public Customer orders. The
                                                   13 See Exchange Rules at Chapter VI, Section                                                                Professional order volume.
                                                1(e)(1). Cancel-replacement order shall mean a           Professional designation focuses                         The Exchange is adopting similar
                                                single message for the immediate cancellation of a       specifically on the number of orders                  counting methods the Exchange believes
                                                previously received order and the replacement of         generated.
                                                that order with a new order with new terms and                                                                 is currently being utilized by NYSE
                                                                                                            NOM’s System executes order based
                                                conditions. If the previously placed order is already
                                                filled partially or in its entirety, the replacement     on Price-Time priority, however, a                       17 Market Professionals have access to
                                                order is automatically canceled or reduced by the        marketplace advantage afforded to                     sophisticated trading systems that contain
                                                number of contracts that were executed. The              Public Customer orders on the Exchange                functionality not available to Public Customers,
                                                replacement order will not retain the priority of the    is that members are generally not                     including things such as continuously updated
                                                cancelled order except when the replacement order                                                              pricing models based upon real-time streaming
                                                reduces the size of the order and all other terms and    assessed transaction fees for the                     data, access to multiple markets simultaneously and
srobinson on DSK5SPTVN1PROD with NOTICES




                                                conditions are retained.                                                                                       order and risk management tools.
                                                   14 Tracking the NBBO shall mean any parent               16 See NYSE Arca, Inc.’s and NYSE MKT LLC’s           18 For example, some broker-dealers provided
                                                order that consumes any self-regulatory                  Joint Regulatory Bulletin (RBO–15–03 and RBO–         their Professional customers with multi-screened
                                                organization order book data feed, or the OPRA           15–06, respectively) dated September 9, 2015; The     trading stations equipped with trading technology
                                                feed, to generate automated child orders, and move       Chicago Board Options Exchange, Incorporated’s        that allows the trader to monitor and place orders
                                                with, or follow the Bid or Offer of the series in        Regulatory Circulator (RG10–126) dated December       on all six options exchanges simultaneously. These
                                                question.                                                1, 2010; and the International Securities Exchange    trading stations also provide compliance filters,
                                                   15 See NOM Rules at Chapter VI, Section 10 and        LLC’s Regulatory Information Circular (2009–179)      order managements tools, the ability to place orders
                                                Chapter XV, Section 2.                                   dated June 23, 2009.                                  in the underlying securities, and market data feeds.



                                           VerDate Sep<11>2014   17:23 Jul 06, 2016   Jkt 238001   PO 00000   Frm 00094   Fmt 4703   Sfmt 4703   E:\FR\FM\07JYN1.SGM   07JYN1


                                                44352                             Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices

                                                MKT, NYSE ARCA and ISE related to                          C. Self-Regulatory Organization’s                         action is necessary or appropriate in the
                                                designation of Professional orders.                        Statement on Comments on the                              public interest, for the protection of
                                                                                                           Proposed Rule Change Received From                        investors, or otherwise in furtherance of
                                                Counting All Orders                                        Members, Participants or Others                           the purposes of the Act. If the
                                                   The Exchange believes that counting                       No written comments were either                         Commission takes such action, the
                                                all orders entered by a Professional                       solicited or received.                                    Commission shall institute proceedings
                                                                                                                                                                     under Section 19(b)(2)(B) of the Act 26 to
                                                toward the number of orders, regardless                    III. Date of Effectiveness of the                         determine whether the proposed rule
                                                of the options exchange to which the                       Proposed Rule Change and Timing for                       change should be approved or
                                                order was routed, does not create an                       Commission Action                                         disapproved.
                                                undue burden on intra-market
                                                                                                              Because the foregoing proposed rule                    IV. Solicitation of Comments
                                                competition because this proposed rule
                                                                                                           change does not: (i) Significantly affect
                                                change will be consistently applied to                     the protection of investors or the public                   Interested persons are invited to
                                                all members in determining Professional                    interest; (ii) impose any significant                     submit written data, views, and
                                                orders.                                                    burden on competition; and (iii) become                   arguments concerning the foregoing,
                                                                                                           operative for 30 days from the date on                    including whether the proposed rule
                                                Cancel and Replace                                                                                                   change is consistent with the Act.
                                                                                                           which it was filed, or such shorter time
                                                   The Exchange believes that its                          as the Commission may designate, it has                   Comments may be submitted by any of
                                                application of cancel and replace orders                   become effective pursuant to Section                      the following methods:
                                                does not create an undue burden on                         19(b)(3)(A)(iii) of the Act 20 and                        Electronic Comments
                                                intra-market competition because this                      subparagraph (f)(6) of Rule 19b–4
                                                                                                                                                                       • Use the Commission’s Internet
                                                application is consistent with Exchange                    thereunder.21 A proposed rule change
                                                                                                                                                                     comment form (http://www.sec.gov/
                                                Rules, where the replacement order is                      filed under Rule 19b–4(f)(6) normally
                                                                                                                                                                     rules/sro.shtml); or
                                                viewed as a new order. This treatment                      does not become operative prior to 30                       • Send an email to rule-comments@
                                                is consistent with the manner in which                     days after the date of filing.22 Rule 19b–                sec.gov. Please include File No. SR–
                                                this order type is applied today within                    4(f)(6)(iii), however, permits the                        NASDAQ–2016–091 on the subject line.
                                                                                                           Commission to designate a shorter time
                                                the Order Book.                                                                                                      Paper Comments
                                                                                                           if such action is consistent with the
                                                Parent/Child Orders                                        protection of investors and the public                       • Send paper comments in triplicate
                                                                                                           interest.23                                               to Secretary, Securities and Exchange
                                                  The Exchange’s treatment of                                 The Exchange has requested that the                    Commission, 100 F Street NE.,
                                                subordinate orders does not create an                      Commission waive the 30-day operative                     Washington, DC 20549–1090.
                                                undue burden on intra-market                               delay. The Commission notes that it has
                                                                                                                                                                     All submissions should refer to File No.
                                                competition because allowing orders on                     considered a substantially similar
                                                                                                                                                                     SR–NASDAQ–2016–091. This file
                                                the same side of the market to be                          proposed rule change filed by CBOE and
                                                                                                                                                                     number should be included on the
                                                counted as a single order is consistent                    PHLX which it approved after a notice
                                                                                                                                                                     subject line if email is used. To help the
                                                with the original intent of the                            and comment period.24 This proposed
                                                                                                                                                                     Commission process and review your
                                                Professional order designation which is                    rule change does not raise any new or
                                                                                                                                                                     comments more efficiently, please use
                                                to count distinct orders and focus on the                  novel issues from those considered in
                                                                                                                                                                     only one method. The Commission will
                                                number of orders generated.                                the CBOE and PHLX proposals. Based
                                                                                                           on the foregoing, the Commission                          post all comments on the Commission’s
                                                  The Exchange does not believe that                       believes that it is consistent with the                   Internet Web site (http://www.sec.gov/
                                                the proposed rule change will impose                       protection of investors and the public                    rules/sro.shtml). Copies of the
                                                an undue burden on inter-market                            interest to waive the 30-day operative                    submission, all subsequent
                                                competition because other exchanges                        date so that the proposal may take effect                 amendments, all written statements
                                                have announced the intent to adopt                         upon filing.25                                            with respect to the proposed rule
                                                similar guidance.19 The Exchange                              At any time within 60 days of the                      change that are filed with the
                                                believes that disparate rules regarding                    filing of such proposed rule change, the                  Commission, and all written
                                                Professional order designation, and a                      Commission summarily may                                  communications relating to the
                                                lack of uniform application of such                        temporarily suspend such rule change if                   proposed rule change between the
                                                                                                           it appears to the Commission that such                    Commission and any person, other than
                                                rules, does not promote the best
                                                                                                                                                                     those that may be withheld from the
                                                regulation and may, in fact, encourage
                                                                                                                20 15
                                                                                                                    U.S.C. 78s(b)(3)(a)(iii).                        public in accordance with the
                                                regulatory arbitrage. The Exchange                              21 17
                                                                                                                    CFR 240.19b–4(f)(6). In addition, Rule 19b–      provisions of 5 U.S.C. 552, will be
                                                believes that it is therefore prudent and                  4(f)(6) requires a self-regulatory organization to give   available for Web site viewing and
                                                necessary to conform its rules to that of                  the Commission written notice of its intent to file       printing in the Commission’s Public
                                                other options exchanges for purposes of                    the proposed rule change at least five business days
                                                                                                                                                                     Reference Room, 100 F Street NE.,
                                                                                                           prior to the date of filing of the proposed rule
                                                calculating the threshold volume of                        change, or such shorter time as designated by the         Washington, DC 20549, on official
                                                orders to be designated as a                               Commission. The Exchange has satisfied this               business days between the hours of
                                                Professional. This is particularly true                    requirement.                                              10:00 a.m. and 3:00 p.m. Copies of such
                                                                                                             22 17 CFR 240.19b–4(f)(6)(iii).
                                                where the Exchange’s third-party                                                                                     filing will also be available for
                                                                                                             23 Id.
                                                routing broker-dealers are members of                                                                                inspection and copying at the principal
srobinson on DSK5SPTVN1PROD with NOTICES




                                                                                                             24 See Securities Exchange Act Release Nos.
                                                several exchanges that have rules                          77450 (March 25, 2016) (Order Approving SR–               office of the Exchange. All comments
                                                requiring Professional order                               CBOE–2016–005); 77449 (March 25, 2016), 81 FR             received will be posted without change;
                                                designations.                                              18665, (March 31, 2016) (Order Approving SR–              the Commission does not edit personal
                                                                                                           Phlx–2016–10).
                                                                                                             25 For purposes only of waiving the 30-day
                                                                                                                                                                     identifying information from
                                                                                                           operative delay, the Commission has considered the        submissions. You should submit only
                                                                                                           proposed rule’s impact on efficiency, competition,
                                                  19 See   supra note 16.                                  and capital formation. See 15 U.S.C. 78c(f).               26 15   U.S.C. 78s(b)(2)(B).



                                           VerDate Sep<11>2014     17:23 Jul 06, 2016   Jkt 238001   PO 00000     Frm 00095   Fmt 4703   Sfmt 4703   E:\FR\FM\07JYN1.SGM      07JYN1


                                                                                   Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices                                                44353

                                                information that you wish to make                        principal office of the Exchange, and at              persons and entities from non-
                                                available publicly. All submissions                      the Commission’s Public Reference                     professional, retail investors or market
                                                should refer to File No. SR–NASDAQ–                      Room.                                                 participants. In order to properly
                                                2016–091 and should be submitted on                                                                            represent orders entered on the
                                                                                                         II. Self-Regulatory Organization’s
                                                or before July 28, 2016.                                                                                       Exchange, Options Members are
                                                                                                         Statement of the Purpose of, and                      required to indicate whether Customer
                                                  For the Commission, by the Division of                 Statutory Basis for, the Proposed Rule
                                                Trading and Markets, pursuant to delegated                                                                     orders are ‘‘Professional’’ orders.6 To
                                                                                                         Change                                                comply with this requirement, Options
                                                authority.27
                                                Robert W. Errett,                                          In its filing with the Commission, the              Members are required to review their
                                                Deputy Secretary.                                        Exchange included statements                          Customers’ activity on at least a
                                                [FR Doc. 2016–16027 Filed 7–6–16; 8:45 am]
                                                                                                         concerning the purpose of and basis for               quarterly basis to determine whether
                                                                                                         the proposed rule change and discussed                orders that are not for the account of a
                                                BILLING CODE 8011–01–P
                                                                                                         any comments it received on the                       broker-dealer should be represented as
                                                                                                         proposed rule change. The text of these               Customer orders or Professional orders.7
                                                SECURITIES AND EXCHANGE                                  statements may be examined at the                        The advent of new multi-leg spread
                                                COMMISSION                                               places specified in Item IV below. The                products and the proliferation of the use
                                                                                                         Exchange has prepared summaries, set                  of complex orders and algorithmic
                                                [Release No. 34–78221; File No. SR–                      forth in Sections A, B, and C below, of               execution strategies by both
                                                BatsEDGX–2016–28]                                        the most significant parts of such                    institutional and retail market
                                                                                                         statements.                                           participants has raised questions as to
                                                Self-Regulatory Organizations; Bats                                                                            what should be counted as an ‘‘order’’
                                                EDGX Exchange, Inc.; Notice of Filing                    A. Self-Regulatory Organization’s                     for Professional order counting
                                                and Immediate Effectiveness of a                         Statement of the Purpose of, and the                  purposes. The proposed changes would
                                                Proposed Rule Change To Add                              Statutory Basis for, the Proposed Rule                specifically address the counting of
                                                Interpretation and Policy .01 to Rule                    Change                                                multi-leg spread products, algorithm
                                                16.1 To Specify the Calculation                                                                                generated orders, and complex orders
                                                Methodology for Counting                                 1. Purpose
                                                                                                                                                               for purposes of determining Professional
                                                Professional Orders                                         The Exchange proposes to add                       status. In addition, the proposal is
                                                                                                         Interpretation and Policy .01 to Rule                 intended to provide guidance regarding
                                                July 1, 2016.                                            16.1 to specify the methodology for
                                                   Pursuant to Section 19(b)(1) of the                                                                         the methodology used by the Exchange
                                                                                                         counting average daily order                          when calculating average daily orders
                                                Securities Exchange Act of 1934 (the                     submissions in listed options to
                                                ‘‘Act’’),1 and Rule 19b–4 thereunder,2                                                                         for Professional order counting
                                                                                                         determine whether a person or entity                  purposes.8
                                                notice is hereby given that on June 30,                  meets the definition of a Professional
                                                2016, Bats EDGX Exchange, Inc. (the                                                                               As proposed, the rule would provide
                                                                                                         (‘‘Professional order counting’’). The                that an order would count as one order
                                                ‘‘Exchange’’ or ‘‘EDGX’’) filed with the                 proposed rule change is designed to
                                                Securities and Exchange Commission                                                                             for Professional counting purposes,
                                                                                                         harmonize Professional order counting                 unless one of the exceptions
                                                (‘‘Commission’’) the proposed rule                       with the recently adopted rules of
                                                change as described in Items I and II                                                                          enumerated in the proposed rule
                                                                                                         competing options exchanges—                          stipulates otherwise (each an
                                                below, which Items have been prepared                    specifically the Chicago Board of
                                                by the Exchange. The Exchange has                                                                              ‘‘Exception’’). The first Exception relates
                                                                                                         Options Exchange, Inc. (‘‘CBOE’’) and                 to the treatment of complex orders for
                                                designated this proposal as a ‘‘non-                     NASDAQ OMX PHLX LLC (‘‘PHLX’’).5
                                                controversial’’ proposed rule change                                                                           purposes of computing orders for
                                                                                                            Rule 16.1(a)(46) defines a Professional            Professional order counting purposes.
                                                pursuant to Section 19(b)(3)(A) of the                   ‘‘as any person or entity that (A) is not
                                                Act 3 and Rule 19b–4(f)(6)(iii)                                                                                Specifically, the proposed rule provides
                                                                                                         a broker or dealer in securities; and (B)             that a complex order of eight (8) option
                                                thereunder,4 which renders it effective                  places more than 390 orders in listed
                                                upon filing with the Commission. The                                                                           legs or less would count as one order,
                                                                                                         options per day on average during a                   whereas a complex order comprised of
                                                Commission is publishing this notice to                  calendar month for its own beneficial
                                                solicit comments on the proposed rule                                                                          nine (9) option legs or more counts as
                                                                                                         account(s).’’ In adopting Rule
                                                change from interested persons.                          16.1(a)(46), the Exchange believed that                 6 See e.g., Rule 18.2(a)(6) (Conduct and

                                                I. Self-Regulatory Organization’s                        identifying Professional accounts based               Compliance with the Rules) (requiring that accurate
                                                Statement of the Terms of Substance of                   upon the average number of orders                     information is input into the System, including but
                                                                                                         entered in qualified accounts is an                   not limited to, the Options Member’s capacity).
                                                the Proposed Rule Change                                                                                         7 Orders for any customer that had an average of

                                                   The Exchange proposes to add                          appropriate, objective approach that                  more than 390 orders per day during any month of
                                                Interpretation and Policy .01 to Rule                    will reasonably distinguish such                      a calendar quarter must be represented as
                                                                                                                                                               Professional orders for the next calendar quarter.
                                                16.1 to specify the manner in which the                     5 See Securities Exchange Act Release Nos. 77450   Option Members would be required to conduct a
                                                Exchange calculates average daily order                  (March 25, 2016), 81 FR 18668, (March 31, 2016)       quarterly review and make any appropriate changes
                                                submissions for purposes of counting                     (SR–CBOE–2016–005); 77449 (March 25, 2016), 81        to the way in which they are representing orders
                                                Professional orders, as further described                FR 18665, (March 31, 2016) (SR–Phlx–2016–10)          within five business days after the end of each
                                                                                                         (approval orders). The Exchange notes that it         calendar quarter. While Option Members only
                                                below.                                                                                                         would be required to review their accounts on a
                                                                                                         recently issued guidance regarding Professional
                                                   The text of the proposed rule change                  order counting. See e.g., Bats BZX Exchange, Inc.     quarterly basis, if during a quarter the Exchange
srobinson on DSK5SPTVN1PROD with NOTICES




                                                is available at the Exchange’s Web site                  and Bats EDGX Exchange Inc., Regulatory Circular      identifies a customer for which orders are being
                                                at www.batstrading.com, at the                           (RC–2015–012, respectively) dated December 21,        represented as Customer orders but that has
                                                                                                         2015. This proposal codifies that guidance in a       averaged more than 390 orders per day during a
                                                  27 17                                                  manner that is consistent with CBOE and PHLX’s        month, the Exchange would notify the Option
                                                        CFR 200.30–3(a)(12).                                                                                   Member would be required to change the manner
                                                  1 15
                                                                                                         approved rules. The Exchange notes that various
                                                       U.S.C. 78s(b)(1).                                 other options exchanges refer to Professionals as     in which it is representing the customer’s orders
                                                  2 17 CFR 240.19b–4.
                                                                                                         ‘‘Professional Customers.’’ The Exchange has          within five business days.
                                                  3 15 U.S.C. 78s(b)(3)(A).                                                                                      8 This proposal is consistent with CBOE and
                                                                                                         proposed to continue to use the term Professional,
                                                  4 17 CFR 240.19b–4(f)(6)(iii).                         as is currently the case in Exchange rules.           PHLX’s approved rules. See supra note 5.



                                           VerDate Sep<11>2014   17:23 Jul 06, 2016   Jkt 238001   PO 00000   Frm 00096   Fmt 4703   Sfmt 4703   E:\FR\FM\07JYN1.SGM   07JYN1



Document Created: 2018-02-08 07:54:40
Document Modified: 2018-02-08 07:54:40
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 44349 

2025 Federal Register | Disclaimer | Privacy Policy
USC | CFR | eCFR