81 FR 83902 - Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Limit Order Protection
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 225 (November 22, 2016)
Federal Register Volume 81, Issue 225 (November 22, 2016)
| Page Range | 83902-83905 | |
| FR Document | 2016-28036 |
[Federal Register Volume 81, Number 225 (Tuesday, November 22, 2016)] [Notices] [Pages 83902-83905] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-28036] [[Page 83902]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79329; File No. SR-BX-2016-058] Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Limit Order Protection November 16, 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 November 4, 2016, NASDAQ BX, Inc. (``BX'' 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 Limit Order Protection or ``LOP'' for members accessing the BX Market Center and adding rule text related to a collar applicable to Primary Pegging and Market Pegging Orders. The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqbx.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 recently adopted a new mechanism to protect against erroneous Limit Orders which are entered into the BX Market Center at Rule 4757(d).\3\ This mechanism addresses risks to market participants of human error in entering Limit Orders at unintended prices. Specifically, LOP prevents certain Limit Orders from executing or being placed on the Order Book at prices outside pre-set standard limits. The System rejects those Limit Orders, rather than executing them automatically. LOP rejects Limit Orders back to the member when the order exceeds certain defined logic. Specifically, LOP prevents certain Limit Orders at prices outside of pre-set standard limits (``LOP Limit'') from being accepted by the System. --------------------------------------------------------------------------- \3\ See Securities Exchange Act Release No. 78246 [sic] (August 24, 2016), 81 FR 59672 (August 30, 2016) (SR-BX-2016-037). --------------------------------------------------------------------------- Modifications of Orders In its adoptive filing, the Exchange noted that LOP shall apply to all Quotes and Orders, including any modified Orders.\4\ At this time, the Exchange proposes to remove ``including any modified Orders'' from the rule text at rule 4757(d)(i). The Exchange proposes to amend this language because it is misleading and may cause confusion. --------------------------------------------------------------------------- \4\ If an Order is modified for price, LOP will review the order anew and, if LOP is triggered, such modification will not take effect and the original order will be rejected. --------------------------------------------------------------------------- The Exchange proposes to state that LOP shall apply to all Quotes and Orders, including Quotes and Orders that have been modified, where the modification results in a new timestamp and priority.\5\ Any Order that is modified within the System, but does not lose priority, for example an Order that was decremented, will not be subject to LOP after it was modified because the system does not cancel decremented orders from the Order Book. If an Order is cancelled either by the member or by the system and a new Order entered into the System, the new Order would be subject to LOP. For example, if the price of an Order is modified, the system will cancel the Order and the modified Order would receive a new timestamp and priority and this Order would be subject to LOP. --------------------------------------------------------------------------- \5\ See Rule 4756 (Entry and Display of Quotes and Orders) at (a)(3). --------------------------------------------------------------------------- Exceptions to LOP The Exchange also noted in its adoptive filing that LOP would not apply to Market Orders, Market Maker Peg Orders \6\ or Intermarket Sweep Orders (ISO).\7\ The Exchange proposes to modify this language to specifically state that LOP would not apply to Orders with Market and Primary Pegging.\8\ --------------------------------------------------------------------------- \6\ A ``Market Maker Peg Order'' is an Order Type designed to allow a Market Maker to maintain a continuous two-sided quotation at a displayed price that is compliant with the quotation requirements for Market Makers set forth in Rule 4613(a)(2). The displayed price of the Market Maker Peg Order is set with reference to a ``Reference Price'' in order to keep the displayed price of the Market Maker Peg Order within a bounded price range. A Market Maker Peg Order may be entered through RASH, FIX or QIX only. A Market Maker Peg Order must be entered with a limit price beyond which the Order may not be priced. The Reference Price for a Market Maker Peg Order to buy (sell) is the then-current National Best Bid (National Best Offer) (including BX), or if no such National Best Bid or National Best Offer, the most recent reported last-sale eligible trade from the responsible single plan processor for that day, or if none, the previous closing price of the security as adjusted to reflect any corporate actions (e.g., dividends or stock splits) in the security. See BX Rule 4702(b)(7). \7\ An Intermarket Sweep or ISO Order, which is an Order that is immediately executable within BX against Orders against which they are marketable, is not subject to LOP. See BX Rule 6951(g). \8\ Orders with Market and Primary Pegging available through RASH, FIX, and QIX only. --------------------------------------------------------------------------- There are three types of Pegging Orders: Primary Pegging, Market Pegging and Midpoint Pegging. Pegging is an Order Attribute that allows an Order to have its price automatically set with reference to the NBBO; provided, however, that if BX is the sole market center at the Best Bid or Best Offer (as applicable), then the price of any Displayed Order with Primary Pegging (as defined below) will be set with reference to the highest bid or lowest offer disseminated by a market center other than BX. An Order with a Pegging Order Attribute may be referred to as a ``Pegged Order.'' \9\ For purposes of this Rule 4703, the price to which an Order is pegged will be referred to as the Inside Quotation, the Inside Bid, or the Inside Offer, as appropriate. There are three varieties of Pegging: --------------------------------------------------------------------------- \9\ Rule 4703(d). ---------------------------------------------------------------------------Primary Pegging means Pegging with reference to the Inside Quotation on the same side of the market. For example, if the Inside Bid was $11, an Order to buy with Primary Pegging would be priced at $11. Market Pegging means Pegging with reference to the Inside Quotation on the opposite side of the market. For example, if the Inside Offer was $11.06, an Order to buy with Market Pegging would be priced at $11.06. Midpoint Pegging means Pegging with reference to the midpoint between the Inside Bid and the Inside Offer (the ``Midpoint''). Thus, if the Inside Bid was [[Page 83903]] $11 and the Inside Offer was $11.06, an Order with Midpoint Pegging would be priced at $11.03. An Order with Midpoint Pegging is not displayed. An Order with Midpoint Pegging may be executed in sub- pennies if necessary to obtain a midpoint price. Midpoint Pegging will be the only Pegging Order subject to LOP, provided it has a limit price. Pegging is available only during Market Hours. An Order with Pegging may specify a limit price beyond which the Order may not be executed; provided, however, that if an Order has been assigned a Pegging Order Attribute and a Discretion Order \10\ Attribute, the Order may execute at any price within the discretionary price range, even if beyond the limit price specified with respect to the Pegging Order Attribute. A Midpoint Pegging Order may have a discretion attribute. A Midpoint Pegging Order with a discretion price would not be subject to LOP. --------------------------------------------------------------------------- \10\ Discretion is an Order Attribute under which an Order has a non-displayed discretionary price range within which the entering Participant is willing to trade; such an Order may be referred to as a ``Discretionary Order.'' See BX Rule 4703(g). --------------------------------------------------------------------------- The Exchange notes that a Midpoint Pegging Order, similar to a Primary or Market Pegging Order, as explained below, may result is [sic] an aggressive or passive price. As a result, the LOP may remove orders that were intended to be more aggressive or passive due to the discretionary attribute. For this reason, the Exchange will not subject a Midpoint Pegging Order with a discretion price to LOP. In addition, an Order with Primary Pegging or Market Pegging may specify an Offset Amount, such that the price of the Order will vary from the Inside Quotation by the selected Offset Amount.\11\ The Offset Amount may be either aggressive or passive. Thus, for example, if a Participant entered an Order to buy with Primary Pegging and a passive Offset Amount of $0.05 and the Inside Bid was $11, the Order would be priced at $10.95. If the Participant selected an aggressive Offset Amount of $0.02, however, the Order would be priced at $11.02. An Order with Primary Pegging and an Offset Amount will not be Displayed, unless the Order is Attributable. The Exchange notes that both Market and Primary Pegging may impact the market by effecting the bid or offer. --------------------------------------------------------------------------- \11\ An offset is not supported for a Midpoint Pegging Order. --------------------------------------------------------------------------- The Exchange is not applying LOP to orders with Market or Primary Pegging because it may result in removing orders that were intended to be more aggressive or to set the bid or offer on the market due to the order attributes noted above. These Pegging Orders are also subject to a collar, which is explained in this rule change. In contrast, an Order with Midpoint Pegging will only be at the midpoint and not have the same impact as the other two types of orders and therefore subjecting such an order to LOP does not impact the potential of the order since by definition it is set to the midpoint. An Order with Midpoint Pegging will not be displayed and is not subject to a collar. An Order with Market Pegging and no Offset behaves as a ``market order'' with respect to any liquidity on the BX Book at the Inside Quotation on the opposite side of the market because it is immediately executable at that price. If, at the time of entry, there is no price to which a Pegged Order can be pegged, the Order will be rejected; provided, however, that a Displayed Order that has Market Pegging, or an Order with a Non-Display Attribute that has Primary Pegging or Market Pegging, will be accepted at its limit price. In the case of an Order with Midpoint Pegging, if the Inside Bid and Inside Offer are locked, the Order will be priced at the locking price, if the Inside Bid and Inside Offer are crossed, the Order will nevertheless be priced at the midpoint between the Inside Bid and Inside Offer, and if there is no Inside Bid and/or Inside Offer, the Order will be rejected.\12\ However, even if the Inside Bid and Inside Offer are locked or crossed, an Order with Midpoint Pegging that locked or crossed an Order on the BX Book would execute (provided, however, that a Midpoint Peg Post-Only Order would execute or post as described in Rule 4702(b)(5)(A)).\13\ It is important to note that only to the extent that a Midpoint Pegging Order has a limit price that the Order would be subject to LOP, unless the Midpoint Pegging Order also has a discretion attribute. If no limit price is specified, the Midpoint Pegging Order would not be subject to LOP. --------------------------------------------------------------------------- \12\ This provision is subject to change by another rule change. See Securities Exchange Act Release No. 78909 (September 22, 2016), 81 FR 66708 (September 28, 2016) (SR-BX-2016-046). The Commission notes that it approved SR-BX-2016-046 on November 10, 2016. See Securities Exchange Act Release No. 79290. \13\ Id. --------------------------------------------------------------------------- LOP will be operational each trading day, except during trading halts and pauses. LOP will not apply in the event that there is no established LOP Reference Price.\14\ The LOP Reference Price shall be the current National Best Bid or Best Offer (NBBO), the bid for sell orders and the offer for buy orders.\15\ --------------------------------------------------------------------------- \14\ For example, if there is a one-sided quote or if the NBB, when used as the LOP Reference Price, is equal to or less than $0.50. \15\ The Exchange will not accept incoming Limit Orders that exceed the LOP Reference Threshold. Limit Orders will not be accepted if the price of the Limit Order is greater than the LOP Reference Threshold for a buy Limit Order. Limit Orders will not be accepted if the price of the Limit Order is less than the LOP Reference Threshold for a sell Limit Order. The LOP Reference Threshold for buy orders will be the LOP Reference Price (offer) plus the applicable percentage specified in the LOP Limit. The LOP Reference Threshold for sell orders will be the LOP Reference Price (bid) minus the applicable percentage specified in the LOP Limit. The LOP Limit will be the greater of 10% of the LOP Reference Price or $0.50 for all securities across all trading sessions. The LOP Reference Price will be the current National Best Bid or Best Offer (NBBO), the bid for sell orders and the offer for buy orders. --------------------------------------------------------------------------- LOP will be applicable on all protocols.\16\ The LOP feature will be mandatory for all BX members. --------------------------------------------------------------------------- \16\ BX maintains several communications protocols for members to use in entering Orders and sending other messages to BX, such as: OUCH, RASH, FLITE, and FIX. --------------------------------------------------------------------------- Implementation of LOP The Exchange indicated in its adoptive rule change that it would implement this rule within ninety (90) days of the approval of the proposed rule change.\17\ At this time, the Exchange proposes to delay this implementation an additional sixty (60) days from the original timeframe in order to implement the LOP with the changes proposed herein. The Exchange will issue an Equities Trader Alert in advance to inform market participants of such implementation date. --------------------------------------------------------------------------- \17\ See note 3 above. --------------------------------------------------------------------------- Pegging Order Collar In 2009, the Exchange adopted a collar for certain Unpriced Orders.\18\ At that time, the Exchange defined an Unpriced Order as any order type permitted by the System to buy or sell shares of a security at the national best bid (best offer) (``NBBO'') at the time when the order reaches the System. Any portion of an Unpriced Order that would execute on BX at a price more than $0.25 or 5 percent worse than the NBBO at the time when the order reaches the System, whichever is greater, will be cancelled. --------------------------------------------------------------------------- \18\ See Securities Exchange Act Release No. 63052 (October 6, 2010), 75 FR 62902 (October 13, 2010) (SR-BX-2010-067). An ``Unpriced Order'' was defined in this rule change as any order type permitted by the System to buy or sell shares of a security at the national best bid (best offer) (``NBBO'') at the time when the order reaches the System. --------------------------------------------------------------------------- This rule related to the collar was inadvertently removed from the [[Page 83904]] Exchange's rules.\19\ At this time, the Exchange proposes to amend the BX rules to add the collar into the rules once again. --------------------------------------------------------------------------- \19\ See Securities Exchange Act Release No. 74617 (March 31, 2015), 80 FR 18473 (March 31, 2015) (SR-BX-2015-015). --------------------------------------------------------------------------- The purpose of the collar is to protect market participants by reducing the risk that Primary and Market Pegging Orders will execute at prices that are significantly worse than the national best bid and offer (``NBBO'') at the time the Exchange receives the order. The Exchange believes that most market participants expect that their order will be executed at its full size at a price reasonably related to the prevailing market. However, market participants may not be aware that there is insufficient liquidity at or near the NBBO to fill the entire order, particularly for more thinly-traded securities. The Exchange proposes to memorialize this collar, which currently exists in its trading and routing systems functionality, and define it specifically as applicable to Primary and Market Pegging Orders. The Exchange seeks to memorialize the rule within Rule 4703, entitled ``Order Attributes.'' The new rule text would state, ``Primary Pegging Orders and Market Pegging Orders are subject to a collar. Any portion of a Primary Pegging Order or Market Pegging Order that would execute, either on the Exchange or when routed to another market center, at a price of more than $0.25 or 5 percent worse than the NBBO at the time when the order reaches the System, whichever is greater, will be cancelled.'' The following example illustrates how the collar works. A market participant submits a routable order to buy 500 shares. The NBBO is $6.00 bid by $6.05 offer, with 100 shares available on each side. Both sides of the NBBO are set by another market center (``Away Market''), but BX has 100 shares available at the $6.05 to sell at the offer price and also has reserve orders to sell 100 shares at $6.32 and 400 shares at $6.40. No other market center is publishing offers to sell the security in between $6.05 and $6.40. In this example, the order would be executed in the following manner: 100 shares would be executed by BX at the $6.05; 400 shares would be routed to the Away Market as an immediate or cancel order with a price of $6.05; 100 shares executed by the Away Market; \20\ --------------------------------------------------------------------------- \20\ This assumes that the Away Market's offer was still available and that the Away Market had no additional non-displayed orders at this price. --------------------------------------------------------------------------- 300 shares returned to BX; 100 shares executed by BX at $6.32 (more than $0.25 but less than 5 percent worse than the NBBO); and 200 shares, representing the remainder of the order, would be cancelled because the remaining liquidity available at $6.40 is more than 5 percent worse than the NBBO. Implementation of Pegging Order Collar The Exchange intends to implement the Pegging Order Collar as soon as practicable pursuant to this proposal. The Exchange requests a waiver of the operative delay to implement the Pegging Order Collar. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,\21\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\22\ 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 mitigating risks to market participants of human error in entering Limit Orders at clearly unintended prices. The proposal will allow for protections for Limit Orders which should encourage price continuity and, in turn, protect investors and the public interest by reducing executions occurring at dislocated prices. --------------------------------------------------------------------------- \21\ 15 U.S.C. 78f(b). \22\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange's proposal to amend the language concerning the modification of Orders is consistent with the Act because only new Orders would be subject to LOP. The proposed new language specifies that Orders that are modified for size and remain in the Order Book with the same priority, because only size was modified to reduce the size, will not be subject to LOP. Other modifications to Orders that amend the timestamp or priority will subject the modified orders to LOP because these Orders will be submitted into the System as new Orders. The LOP functionality protects market participants by reducing the risk that Midpoint Pegging Orders will execute at prices that are significantly worse than the national best bid and offer (``NBBO'') at the time the Exchange receives the order. The LOP feature assists with the maintenance of fair and orderly markets by mitigating the risks associated with errors resulting in executions at prices that are away from the Best Bid or Offer and potentially erroneous. Further it protects investors from potentially receiving executions away from the prevailing prices at any given time. The Exchange adopted LOP to avoid a series of improperly priced aggressive orders transacting in the Order Book. The Exchange believes that excluding Primary Pegging and Market Pegging Orders is consistent with the Act because including such orders may result in removing orders that were intended to be more aggressive or to set the bid or offer on the market due to the order attributes noted in the Purpose section of this rule change. Market and Primary Pegging Orders are also currently subject to a collar. Market and Primary Pegging Orders that would execute, either on the Exchange or when routed to another market center, at a price of more than $0.25 or 5 percent worse than the NBBO at the time when the order reaches the System, whichever is greater, will be cancelled.\23\ Further, the Market Pegging Order has its own process for rejecting those orders where no price exists to which a Pegged Order can be pegged. --------------------------------------------------------------------------- \23\ The Exchange inadvertently removed the rule from the BX Rulebook. The Exchange proposes to adopt the rule herein. --------------------------------------------------------------------------- This feature should create a level of protection that prevents the Limit Orders from entering the Order Book outside of an acceptable range for the Limit Order to execute. The LOP should reduce the negative impacts of sudden, unanticipated volatility, and serve to preserve an orderly market in a transparent and uniform manner, increase overall market confidence, and promote fair and orderly markets and the protection of investors. Pegging Order Collar The Exchange believes that the collar proposal is consistent with the Act because 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 avoiding execution of Primary and Market Pegging Orders (either on BX or on other market centers as a result of orders routed by BX) at prices that are significantly worse than the NBBO at the time the order is initially received. The NBBO provides reasonable guidance of the current value of a given security and therefore market participants should have confidence that their Market and Primary Pegging Orders will not be executed at a significantly worse price than the NBBO. [[Page 83905]] B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The LOP feature should provide market participants with additional price protection from anomalous executions. This feature is not optional and is applicable to all members submitting Limit Orders. Thus, the Exchange does not believe the proposal creates any significant impact on competition. In addition, the proposed collar in Rule 4703 would be applicable to all Market and Primary Pegging Orders entered into the BX System. Similarly, all Midpoint Pegging Order will be subject to LOP, unless they have a discretion attribute. 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) of the Act and Rule 19b- 4(f)(6) thereunder.\24\ --------------------------------------------------------------------------- \24\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b- 4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of 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. --------------------------------------------------------------------------- A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act \25\ normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \26\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. When the Exchange first proposed the LOP, the Exchange represented that it would implement the LOP within 90 days of obtaining Commission approval (i.e., by November 22, 2016).\27\ The Exchange now proposes to extend the LOP implementation date by 60 days in order to include the modifications in this proposed rule change with the implementation of the LOP. Waiver of the 30-day operative delay would allow the Exchange to immediately extend the LOP implementation date. The waiver would also permit the Exchange to immediately clarify the application of the LOP to modified orders. Moreover, the waiver would allow the Exchange to immediately exclude from the LOP Market Pegging Orders, Primary Pegging Orders, and Midpoint Pegging Orders that have a discretion price. As noted above, the Exchange proposes to exclude these Orders because these Orders may be intended to be aggressive or to set the bid or offer on the market. Moreover, as noted above, Market and Primary Pegging Orders are currently subject to collars. Lastly, the waiver would allow the Exchange's rules to immediately and accurately reflect the current collars for Market and Primary Pegging Orders, which were removed inadvertently. Accordingly, the Commission finds that waiving the 30-day operative delay is consistent with the protection of investors and the public interest and designates the proposal operative upon filing.\28\ --------------------------------------------------------------------------- \25\ 17 CFR 240.19b-4(f)(6). \26\ 17 CFR 240.19b-4(f)(6)(iii). \27\ See Securities Exchange Act Release Nos. 78244 (July 7, 2016), 81 FR 45320 (July 13, 2016) (noticing SR-BX-2016-037) and 78667 (August 24, 2016), 81 FR 59672 (August 30, 2016) (approving SR-BX-2016-037). \28\ 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. 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 to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-BX-2016-058 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-BX-2016-058. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BX-2016-058 and should be submitted on or before December 13, 2016. --------------------------------------------------------------------------- \29\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\29\ Brent J. Fields, Secretary. [FR Doc. 2016-28036 Filed 11-21-16; 8:45 am] BILLING CODE 8011-01-P
![83902 Federal Register / Vol. 81, No. 225 / Tuesday, November 22, 2016 / Notices
SECURITIES AND EXCHANGE A. Self-Regulatory Organization’s apply to Market Orders, Market Maker
COMMISSION Statement of the Purpose of, and Peg Orders 6 or Intermarket Sweep
Statutory Basis for, the Proposed Rule Orders (ISO).7 The Exchange proposes
[Release No. 34–79329; File No. SR–BX– Change to modify this language to specifically
2016–058] state that LOP would not apply to
1. Purpose
Orders with Market and Primary
The Exchange recently adopted a new Pegging.8
Self-Regulatory Organizations;
mechanism to protect against erroneous There are three types of Pegging
NASDAQ BX, Inc.; Notice of Filing and
Limit Orders which are entered into the Orders: Primary Pegging, Market
Immediate Effectiveness of Proposed BX Market Center at Rule 4757(d).3 This Pegging and Midpoint Pegging. Pegging
Rule Change To Amend the Limit mechanism addresses risks to market is an Order Attribute that allows an
Order Protection participants of human error in entering Order to have its price automatically set
November 16, 2016. Limit Orders at unintended prices. with reference to the NBBO; provided,
Specifically, LOP prevents certain Limit however, that if BX is the sole market
Pursuant to Section 19(b)(1) of the Orders from executing or being placed center at the Best Bid or Best Offer (as
Securities Exchange Act of 1934 on the Order Book at prices outside pre- applicable), then the price of any
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 set standard limits. The System rejects Displayed Order with Primary Pegging
notice is hereby given that on November those Limit Orders, rather than (as defined below) will be set with
4, 2016, NASDAQ BX, Inc. (‘‘BX’’ or executing them automatically. LOP reference to the highest bid or lowest
‘‘Exchange’’) filed with the Securities rejects Limit Orders back to the member offer disseminated by a market center
and Exchange Commission (‘‘SEC’’ or when the order exceeds certain defined other than BX. An Order with a Pegging
‘‘Commission’’) the proposed rule logic. Specifically, LOP prevents certain Order Attribute may be referred to as a
change as described in Items I and II Limit Orders at prices outside of pre-set ‘‘Pegged Order.’’ 9 For purposes of this
below, which Items have been prepared standard limits (‘‘LOP Limit’’) from Rule 4703, the price to which an Order
by the Exchange. The Commission is being accepted by the System. is pegged will be referred to as the
publishing this notice to solicit Modifications of Orders Inside Quotation, the Inside Bid, or the
comments on the proposed rule change Inside Offer, as appropriate. There are
In its adoptive filing, the Exchange three varieties of Pegging:
from interested persons. noted that LOP shall apply to all Quotes • Primary Pegging means Pegging
I. Self-Regulatory Organization’s and Orders, including any modified with reference to the Inside Quotation
Statement of the Terms of Substance of Orders.4 At this time, the Exchange on the same side of the market. For
the Proposed Rule Change proposes to remove ‘‘including any example, if the Inside Bid was $11, an
modified Orders’’ from the rule text at Order to buy with Primary Pegging
The Exchange proposes to amend the rule 4757(d)(i). The Exchange proposes would be priced at $11.
Limit Order Protection or ‘‘LOP’’ for to amend this language because it is • Market Pegging means Pegging with
members accessing the BX Market misleading and may cause confusion. reference to the Inside Quotation on the
Center and adding rule text related to a The Exchange proposes to state that opposite side of the market. For
collar applicable to Primary Pegging and LOP shall apply to all Quotes and example, if the Inside Offer was $11.06,
Market Pegging Orders. Orders, including Quotes and Orders an Order to buy with Market Pegging
that have been modified, where the would be priced at $11.06.
The text of the proposed rule change modification results in a new timestamp
is available on the Exchange’s Web site • Midpoint Pegging means Pegging
and priority.5 Any Order that is with reference to the midpoint between
at http://nasdaqbx.cchwallstreet.com/, modified within the System, but does the Inside Bid and the Inside Offer (the
at the principal office of the Exchange, not lose priority, for example an Order ‘‘Midpoint’’). Thus, if the Inside Bid was
and at the Commission’s Public that was decremented, will not be
Reference Room. subject to LOP after it was modified 6 A ‘‘Market Maker Peg Order’’ is an Order Type
because the system does not cancel designed to allow a Market Maker to maintain a
II. Self-Regulatory Organization’s decremented orders from the Order continuous two-sided quotation at a displayed price
Statement of the Purpose of, and Book. If an Order is cancelled either by that is compliant with the quotation requirements
Statutory Basis for, the Proposed Rule the member or by the system and a new for Market Makers set forth in Rule 4613(a)(2). The
Change displayed price of the Market Maker Peg Order is
Order entered into the System, the new set with reference to a ‘‘Reference Price’’ in order
Order would be subject to LOP. For to keep the displayed price of the Market Maker Peg
In its filing with the Commission, the Order within a bounded price range. A Market
example, if the price of an Order is
Exchange included statements Maker Peg Order may be entered through RASH,
modified, the system will cancel the
concerning the purpose of and basis for Order and the modified Order would
FIX or QIX only. A Market Maker Peg Order must
be entered with a limit price beyond which the
the proposed rule change and discussed receive a new timestamp and priority Order may not be priced. The Reference Price for
any comments it received on the and this Order would be subject to LOP. a Market Maker Peg Order to buy (sell) is the then-
proposed rule change. The text of these current National Best Bid (National Best Offer)
statements may be examined at the Exceptions to LOP (including BX), or if no such National Best Bid or
National Best Offer, the most recent reported last-
places specified in Item IV below. The The Exchange also noted in its sale eligible trade from the responsible single plan
Exchange has prepared summaries, set adoptive filing that LOP would not processor for that day, or if none, the previous
forth in sections A, B, and C below, of closing price of the security as adjusted to reflect
sradovich on DSK3GMQ082PROD with NOTICES
3 See Securities Exchange Act Release No. 78246 any corporate actions (e.g., dividends or stock
the most significant aspects of such splits) in the security. See BX Rule 4702(b)(7).
[sic] (August 24, 2016), 81 FR 59672 (August 30,
statements. 2016) (SR–BX–2016–037). 7 An Intermarket Sweep or ISO Order, which is
4 If an Order is modified for price, LOP will an Order that is immediately executable within BX
review the order anew and, if LOP is triggered, such against Orders against which they are marketable,
modification will not take effect and the original is not subject to LOP. See BX Rule 6951(g).
order will be rejected. 8 Orders with Market and Primary Pegging
1 15 U.S.C. 78s(b)(1). 5 See Rule 4756 (Entry and Display of Quotes and available through RASH, FIX, and QIX only.
2 17 CFR 240.19b–4. Orders) at (a)(3). 9 Rule 4703(d).
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![Federal Register / Vol. 81, No. 225 / Tuesday, November 22, 2016 / Notices 83903
$11 and the Inside Offer was $11.06, an the market due to the order attributes Bid or Best Offer (NBBO), the bid for
Order with Midpoint Pegging would be noted above. These Pegging Orders are sell orders and the offer for buy
priced at $11.03. An Order with also subject to a collar, which is orders.15
Midpoint Pegging is not displayed. An explained in this rule change. LOP will be applicable on all
Order with Midpoint Pegging may be In contrast, an Order with Midpoint
protocols.16 The LOP feature will be
executed in sub-pennies if necessary to Pegging will only be at the midpoint
and not have the same impact as the mandatory for all BX members.
obtain a midpoint price.
Midpoint Pegging will be the only other two types of orders and therefore Implementation of LOP
Pegging Order subject to LOP, provided subjecting such an order to LOP does
it has a limit price. Pegging is available not impact the potential of the order The Exchange indicated in its
only during Market Hours. An Order since by definition it is set to the adoptive rule change that it would
with Pegging may specify a limit price midpoint. An Order with Midpoint implement this rule within ninety (90)
beyond which the Order may not be Pegging will not be displayed and is not days of the approval of the proposed
executed; provided, however, that if an subject to a collar. rule change.17 At this time, the
Order has been assigned a Pegging An Order with Market Pegging and no Exchange proposes to delay this
Order Attribute and a Discretion Offset behaves as a ‘‘market order’’ with implementation an additional sixty (60)
Order 10 Attribute, the Order may respect to any liquidity on the BX Book days from the original timeframe in
execute at any price within the at the Inside Quotation on the opposite order to implement the LOP with the
discretionary price range, even if side of the market because it is changes proposed herein. The Exchange
beyond the limit price specified with immediately executable at that price. If, will issue an Equities Trader Alert in
respect to the Pegging Order Attribute. at the time of entry, there is no price to advance to inform market participants
A Midpoint Pegging Order may have a which a Pegged Order can be pegged, of such implementation date.
discretion attribute. A Midpoint Pegging the Order will be rejected; provided,
Order with a discretion price would not however, that a Displayed Order that Pegging Order Collar
be subject to LOP. has Market Pegging, or an Order with a
The Exchange notes that a Midpoint Non-Display Attribute that has Primary In 2009, the Exchange adopted a
Pegging Order, similar to a Primary or Pegging or Market Pegging, will be collar for certain Unpriced Orders.18 At
Market Pegging Order, as explained accepted at its limit price. that time, the Exchange defined an
below, may result is [sic] an aggressive In the case of an Order with Midpoint Unpriced Order as any order type
or passive price. As a result, the LOP Pegging, if the Inside Bid and Inside permitted by the System to buy or sell
may remove orders that were intended Offer are locked, the Order will be shares of a security at the national best
to be more aggressive or passive due to priced at the locking price, if the Inside bid (best offer) (‘‘NBBO’’) at the time
the discretionary attribute. For this Bid and Inside Offer are crossed, the when the order reaches the System. Any
reason, the Exchange will not subject a Order will nevertheless be priced at the portion of an Unpriced Order that
Midpoint Pegging Order with a midpoint between the Inside Bid and would execute on BX at a price more
discretion price to LOP. Inside Offer, and if there is no Inside than $0.25 or 5 percent worse than the
In addition, an Order with Primary Bid and/or Inside Offer, the Order will NBBO at the time when the order
Pegging or Market Pegging may specify be rejected.12 However, even if the reaches the System, whichever is
an Offset Amount, such that the price of Inside Bid and Inside Offer are locked greater, will be cancelled.
the Order will vary from the Inside or crossed, an Order with Midpoint
Pegging that locked or crossed an Order This rule related to the collar was
Quotation by the selected Offset
Amount.11 The Offset Amount may be on the BX Book would execute inadvertently removed from the
either aggressive or passive. Thus, for (provided, however, that a Midpoint Peg
15 The Exchange will not accept incoming Limit
example, if a Participant entered an Post-Only Order would execute or post
Orders that exceed the LOP Reference Threshold.
Order to buy with Primary Pegging and as described in Rule 4702(b)(5)(A)).13 It Limit Orders will not be accepted if the price of the
a passive Offset Amount of $0.05 and is important to note that only to the Limit Order is greater than the LOP Reference
the Inside Bid was $11, the Order would extent that a Midpoint Pegging Order Threshold for a buy Limit Order. Limit Orders will
be priced at $10.95. If the Participant has a limit price that the Order would not be accepted if the price of the Limit Order is
less than the LOP Reference Threshold for a sell
selected an aggressive Offset Amount of be subject to LOP, unless the Midpoint Limit Order. The LOP Reference Threshold for buy
$0.02, however, the Order would be Pegging Order also has a discretion orders will be the LOP Reference Price (offer) plus
priced at $11.02. An Order with Primary attribute. If no limit price is specified, the applicable percentage specified in the LOP
Pegging and an Offset Amount will not the Midpoint Pegging Order would not Limit. The LOP Reference Threshold for sell orders
will be the LOP Reference Price (bid) minus the
be Displayed, unless the Order is be subject to LOP. applicable percentage specified in the LOP Limit.
Attributable. The Exchange notes that LOP will be operational each trading The LOP Limit will be the greater of 10% of the
both Market and Primary Pegging may day, except during trading halts and LOP Reference Price or $0.50 for all securities
impact the market by effecting the bid pauses. LOP will not apply in the event across all trading sessions. The LOP Reference Price
that there is no established LOP will be the current National Best Bid or Best Offer
or offer. (NBBO), the bid for sell orders and the offer for buy
The Exchange is not applying LOP to Reference Price.14 The LOP Reference orders.
orders with Market or Primary Pegging Price shall be the current National Best 16 BX maintains several communications
because it may result in removing orders protocols for members to use in entering Orders and
12 This provision is subject to change by another sending other messages to BX, such as: OUCH,
that were intended to be more RASH, FLITE, and FIX.
rule change. See Securities Exchange Act Release
sradovich on DSK3GMQ082PROD with NOTICES
aggressive or to set the bid or offer on No. 78909 (September 22, 2016), 81 FR 66708 17 See note 3 above.
(September 28, 2016) (SR–BX–2016–046). The 18 See Securities Exchange Act Release No. 63052
10 Discretion is an Order Attribute under which Commission notes that it approved SR–BX–2016– (October 6, 2010), 75 FR 62902 (October 13, 2010)
an Order has a non-displayed discretionary price 046 on November 10, 2016. See Securities Exchange (SR–BX–2010–067). An ‘‘Unpriced Order’’ was
range within which the entering Participant is Act Release No. 79290. defined in this rule change as any order type
willing to trade; such an Order may be referred to 13 Id.
permitted by the System to buy or sell shares of a
as a ‘‘Discretionary Order.’’ See BX Rule 4703(g). 14 For example, if there is a one-sided quote or if security at the national best bid (best offer)
11 An offset is not supported for a Midpoint the NBB, when used as the LOP Reference Price, (‘‘NBBO’’) at the time when the order reaches the
Pegging Order. is equal to or less than $0.50. System.
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![Federal Register / Vol. 81, No. 225 / Tuesday, November 22, 2016 / Notices 83905
B. Self-Regulatory Organization’s LOP within 90 days of obtaining Electronic Comments
Statement on Burden on Competition Commission approval (i.e., by
November 22, 2016).27 The Exchange • Use the Commission’s Internet
The Exchange does not believe that comment form (http://www.sec.gov/
the proposed rule change will impose now proposes to extend the LOP
implementation date by 60 days in order rules/sro.shtml); or
any burden on competition not
necessary or appropriate in furtherance to include the modifications in this • Send an email to rule-comments@
of the purposes of the Act. The LOP proposed rule change with the sec.gov. Please include File Number SR–
feature should provide market implementation of the LOP. Waiver of BX–2016–058 on the subject line.
participants with additional price the 30-day operative delay would allow
the Exchange to immediately extend the Paper Comments
protection from anomalous executions.
LOP implementation date. The waiver
This feature is not optional and is • Send paper comments in triplicate
applicable to all members submitting would also permit the Exchange to
to Brent J. Fields, Secretary, Securities
Limit Orders. Thus, the Exchange does immediately clarify the application of
the LOP to modified orders. Moreover, and Exchange Commission, 100 F Street
not believe the proposal creates any NE., Washington, DC 20549–1090.
significant impact on competition. In the waiver would allow the Exchange to
addition, the proposed collar in Rule immediately exclude from the LOP All submissions should refer to File
4703 would be applicable to all Market Market Pegging Orders, Primary Pegging Number SR–BX–2016–058. This file
and Primary Pegging Orders entered Orders, and Midpoint Pegging Orders number should be included on the
into the BX System. Similarly, all that have a discretion price. As noted subject line if email is used. To help the
Midpoint Pegging Order will be subject above, the Exchange proposes to Commission process and review your
to LOP, unless they have a discretion exclude these Orders because these comments more efficiently, please use
attribute. Orders may be intended to be aggressive only one method. The Commission will
or to set the bid or offer on the market. post all comments on the Commission’s
C. Self-Regulatory Organization’s Moreover, as noted above, Market and
Statement on Comments on the Internet Web site (http://www.sec.gov/
Primary Pegging Orders are currently
Proposed Rule Change Received From rules/sro.shtml). Copies of the
subject to collars. Lastly, the waiver
Members, Participants, or Others submission, all subsequent
would allow the Exchange’s rules to
immediately and accurately reflect the amendments, all written statements
No written comments were either
current collars for Market and Primary with respect to the proposed rule
solicited or received.
Pegging Orders, which were removed change that are filed with the
III. Date of Effectiveness of the inadvertently. Accordingly, the Commission, and all written
Proposed Rule Change and Timing for Commission finds that waiving the 30- communications relating to the
Commission Action day operative delay is consistent with proposed rule change between the
Because the foregoing proposed rule the protection of investors and the Commission and any person, other than
change does not: (i) Significantly affect public interest and designates the those that may be withheld from the
the protection of investors or the public proposal operative upon filing.28 public in accordance with the
interest; (ii) impose any significant At any time within 60 days of the provisions of 5 U.S.C. 552, will be
burden on competition; and (iii) become filing of such proposed rule change, the available for Web site viewing and
operative for 30 days from the date on Commission summarily may printing in the Commission’s Public
which it was filed, or such shorter time temporarily suspend such rule change if Reference Room, 100 F Street NE.,
as the Commission may designate, it has it appears to the Commission that such Washington, DC 20549, on official
become effective pursuant to Section action is necessary or appropriate in the business days between the hours of
19(b)(3)(A) of the Act and Rule 19b– public interest, for the protection of 10:00 a.m. and 3:00 p.m. Copies of the
4(f)(6) thereunder.24 investors, or otherwise in furtherance of filing also will be available for
A proposed rule change filed inspection and copying at the principal
the purposes of the Act. If the
pursuant to Rule 19b–4(f)(6) under the
Commission takes such action, the office of the Exchange. All comments
Act 25 normally does not become
Commission shall institute proceedings received will be posted without change;
operative for 30 days after the date of its
to determine whether the proposed rule the Commission does not edit personal
filing. However, Rule 19b–4(f)(6)(iii) 26
change should be approved or identifying information from
permits the Commission to designate a
disapproved. submissions. You should submit only
shorter time if such action is consistent
with the protection of investors and the IV. Solicitation of Comments information that you wish to make
public interest. The Exchange has asked available publicly. All submissions
the Commission to waive the 30-day Interested persons are invited to should refer to File Number SR–BX–
operative delay so that the proposal may submit written data, views, and 2016–058 and should be submitted on
become operative immediately upon arguments concerning the foregoing, or before December 13, 2016.
filing. When the Exchange first including whether the proposed rule For the Commission, by the Division of
proposed the LOP, the Exchange change is consistent with the Act. Trading and Markets, pursuant to delegated
represented that it would implement the Comments may be submitted by any of authority.29
the following methods:
Brent J. Fields,
24 17 CFR 240.19b–4(f)(6). As required under Rule
sradovich on DSK3GMQ082PROD with NOTICES
19b–4(f)(6)(iii), the Exchange provided the 27 See Securities Exchange Act Release Nos. Secretary.
Commission with written notice of its intent to file 78244 (July 7, 2016), 81 FR 45320 (July 13, 2016) [FR Doc. 2016–28036 Filed 11–21–16; 8:45 am]
the proposed rule change, along with a brief (noticing SR–BX–2016–037) and 78667 (August 24, BILLING CODE 8011–01–P
description and the text of the proposed rule 2016), 81 FR 59672 (August 30, 2016) (approving
change, at least five business days prior to the date SR–BX–2016–037).
of filing of the proposed rule change, or such 28 For purposes only of waiving the 30-day
shorter time as designated by the Commission. operative delay, the Commission has considered the
25 17 CFR 240.19b–4(f)(6).
proposed rule’s impact on efficiency, competition,
26 17 CFR 240.19b–4(f)(6)(iii). and capital formation. 15 U.S.C. 78c(f). 29 17 CFR 200.30–3(a)(12).
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Document Created: 2018-02-14 08:29:35
Document Modified: 2018-02-14 08:29:35
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 83902 |
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