82 FR 32386 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a New Extended Life Priority Order Attribute Under Rule 4703, and To Make Related Changes to Rules 4702, 4752, 4753, 4754, and 4757

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 133 (July 13, 2017)

Page Range		32386-32392
FR Document		2017-14666

Federal Register, Volume 82 Issue 133 (Thursday, July 13, 2017)

[Federal Register Volume 82, Number 133 (Thursday, July 13, 2017)]
[Notices]
[Pages 32386-32392]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2017-14666]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81097; File No. SR-NASDAQ-2016-161]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To
Adopt a New Extended Life Priority Order Attribute Under Rule 4703, and
To Make Related Changes to Rules 4702, 4752, 4753, 4754, and 4757

July 7, 2017.

I. Introduction

On November 17, 2016, the NASDAQ Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt a new extended life priority order
(``ELO'') attribute for designated retail orders under Nasdaq Rule
(``Rule(s)'') 4703, and to make related changes to Rules 4702, 4752,
4753, 4754, and 4757. The proposed rule change was published for
comment in the Federal Register on December 5, 2016.\3\ On January 17,
2017, pursuant to Section 19(b)(2) of the Act,\4\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to approve or disapprove the proposed rule
change.\5\ The Commission initially received seven comment letters on
the proposed rule change.\6\ On February 17, 2017, the Exchange filed
Amendment No. 1 to the proposed rule change \7\ and submitted a comment
response letter.\8\ The Commission subsequently received two additional
comment letters on the proposed rule change.\9\ On March 3, 2017, the
Commission instituted proceedings under Section 19(b)(2)(B) of the Act
\10\ to determine whether to approve or disapprove the proposed rule
change, as modified by Amendment No. 1.\11\ The Commission received two
additional comment letters on the proposed rule change in response to
the Order Instituting Proceedings.\12\ On April 24, 2017, the Exchange
submitted a second comment response letter.\13\ On May 31, 2017, the
Exchange extended the time period for Commission action to August 2,
2017. This order approves the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 79428 (November 30,
2016), 81 FR 87628 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 79810, 82 FR 8244
(January 24, 2017). The Commission designated March 5, 2017 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
\6\ See Letters to Brent J. Fields, Secretary, Commission, from:
Joseph Saluzzi and Sal Arnuk, Partners, Themis Trading LLC, dated
December 19, 2016 (``Themis Letter I''); Eric Swanson, EVP, General
Counsel, and Secretary, Bats Global Markets, Inc., dated December
22, 2016 (``BATS Letter''); Adam Nunes, Head of Business
Development, Hudson River Trading LLC, dated December 22, 2016
(``Hudson River Trading Letter''); Joanna Mallers, Secretary, FIA
Principal Traders Group, dated December 23, 2016 (``FIA PTG Letter
I''); Adam C. Cooper, Senior Managing Director and Chief Legal
Officer, Citadel Securities, dated December 27, 2016 (``Citadel
Letter I''); Andrew Stevens, General Counsel, IMC Financial Markets,
dated December 28, 2016 (``IMC Letter''); and Venu Palaparthi, SVP,
Compliance, Regulatory & Government Affairs, Virtu Financial LLC,
dated February 9, 2017 (``Virtu Letter'').
\7\ In Amendment No. 1, the Exchange: (i) Specified that the ELO
attribute would be available during ``System Hours'' as defined in
Rule 4701(g); (ii) clarified that any subsequent proposal to broaden
the availability of the ELO attribute would be set forth in a
distinct rule filing; (iii) provided additional details regarding
the calculation of the 99% ELO eligibility requirement; (iv)
proposed to assess members' compliance with ELO eligibility
requirements on a monthly basis instead of a quarterly basis as
initially proposed; (v) stated that, concurrently with the initial
launch of the ELO attribute, it will implement new surveillances to
identify any potential misuse of the ELO attribute; (vi) provided
additional discussions regarding the availability of the ELO
identifier on the Exchange's TotalView ITCH market data feed; (vii)
provided additional details as to how the ELO attribute would
operate with other order attributes and cross-specific order types;
(viii) provided information regarding the Exchange's implementation
of the ELO attribute; and (ix) provided additional justifications
for proposing the ELO attribute. Amendment No. 1 has been placed in
the public comment file for SR-NASDAQ-2016-161 at https://www.sec.gov/comments/sr-nasdaq-2016-161/nasdaq2016161-1589828-132168.pdf.
\8\ See Letter to Brent J. Fields, Secretary, Commission, from
T. Sean Bennett, Associate Vice President and Principal Associate
General Counsel, Nasdaq, dated February 17, 2017 (``Nasdaq Response
Letter I'').
\9\ See Letters to Brent J. Fields, Secretary, Commission, from:
John Ramsay, Chief Market Policy Officer, Investors Exchange LLC,
dated March 2, 2017 (``IEX Letter''); and Joseph Saluzzi and Sal
Arnuk, Partners, Themis Trading LLC, dated March 3, 2017 (``Themis
Letter II'').
\10\ 15 U.S.C. 78s(b)(2)(B).
\11\ See Securities Exchange Act Release No. 80149, 82 FR 13168
(March 9, 2017) (``Order Instituting Proceedings'').
\12\ See Letter to Brent J. Fields, Secretary, Commission, from
Joanna Mallers, Secretary, FIA Principal Traders Group, dated March
30, 2017 (``FIA PTG Letter II''); Letter to Eduardo A. Aleman,
Assistant Secretary, Commission, from Stephen John Berger, Managing
Director, Government & Regulatory Policy, Citadel Securities, dated
March 30, 2017 (``Citadel Letter II'').
\13\ See Letter to Brent J. Fields, Secretary, Commission, from
T. Sean Bennett, Associate Vice President and Principal Associate
General Counsel, Nasdaq, dated April 24, 2017 (``Nasdaq Response
Letter II'').
---------------------------------------------------------------------------

II. Description of the Proposal, as Modified by Amendment No. 1

The Exchange has proposed to offer a new ELO attribute, which would
allow certain displayed retail orders to receive higher priority on the
Nasdaq book than other orders at the same price (``Extended Life
Priority''), and to make conforming changes to its rules. As discussed
in more detail below, the Exchange has proposed to amend Rule 4703 to
set forth the ELO attribute in new subparagraph (m), add an attachment
B to its designated retail order attestation form that sets forth an
attestation that would be required of members in connection with
utilizing the ELO attribute, and make related changes to Rules 4702(b),
4752, 4753, 4754, and 4757.

A. Proposed Rule 4703(m) and Attestation

Proposed Rule 4703(m) states that ELO is an order attribute that
allows an order to receive priority in the Nasdaq book above other
orders resting on the Nasdaq book at the same price that are

[[Page 32387]]

not designated with the ELO attribute.\14\ As proposed, the ELO
attribute would be available only for displayed orders that qualify as
Designated Retail Orders,\15\ and would be available during System
Hours.\16\ A Designated Retail Order with the ELO attribute that is not
marketable upon entry would be ranked on the Nasdaq book ahead of other
displayed orders at the same price level that do not have the ELO
attribute, but behind any other ELO orders at the same price level that
the Exchange received previously.\17\
---------------------------------------------------------------------------

\14\ See also proposed changes to Rule 4757(a)(1)(B).
\15\ See proposed Rule 4703(m). A ``Designated Retail Order'' is
an agency or riskless principal order that meets the criteria of
FINRA Rule 5320.03 and that originates from a natural person and is
submitted to Nasdaq by a member that designates it pursuant to Rule
7018, provided that no change is made to the terms of the order with
respect to price or side of market and the order does not originate
from a trading algorithm or any other computerized methodology. See
Rule 7018. If a Designated Retail Order with a non-display attribute
is also entered with the ELO attribute, the ELO attribute would be
ignored and the order would be ranked on the Nasdaq book as a non-
displayed order without Extended Life Priority. See proposed Rule
4703(m). The Exchange has stated that it may propose to extend the
availability of the ELO functionality to all orders that meet the
requirements of the ELO attribute at a later time. See Notice, 81 FR
at 87630; see also Amendment No. 1. According to the Exchange, any
such proposal would be made through a separate filing of a proposed
rule change with the Commission, and would likely require
significant changes to the operation of the ELO attribute to account
for the different participants eligible to use the attribute. See
Amendment No. 1.
\16\ See Amendment No. 1. See also Rule 4701(g) (defining
``System Hours'' to mean the period of time beginning at 4:00 a.m.
ET and ending at 8:00 p.m. ET (or such earlier time as may be
designated by Nasdaq on a day when Nasdaq closes early)).
\17\ See proposed Rule 4703(m); see also Notice, 81 FR at 87631.
---------------------------------------------------------------------------

As proposed, at least 99% of the Designated Retail Orders with the
ELO attribute entered by the member must exist unaltered on the Nasdaq
book for a minimum of one second for an Exchange member to be eligible
to use the ELO attribute.\18\ Exchange members would be required to
submit a signed written attestation that they will comply with these
eligibility requirements.\19\
---------------------------------------------------------------------------

\18\ See proposed Rule 4703(m). The Exchange has stated that it
will monitor the effectiveness of the one-second minimum resting
time and the 99% threshold, and will propose to adjust these
requirements, as needed, in a separate proposed rule change with the
Commission. See Amendment No. 1.
\19\ See proposed Rule 4703(m). The Exchange has proposed to
amend its designated retail order attestation form to add an
attachment B in order to require members to attest to compliance
with the eligibility requirements for the ELO attribute, and to
attest to their understanding of the penalties in cases of non-
compliance. See proposed changes to the designated retail order
attestation form, included as Exhibit 3 to Amendment No. 1. As
proposed, the designated retail order attestation form also would
inform members that they can designate certain order entry ports as
``Retail Extended Life Order Ports'' or tag each order as a ``Retail
Extended Life Order.'' See id.
---------------------------------------------------------------------------

For purposes of determining compliance with the 99% threshold, the
Exchange would measure the number of orders with the ELO attribute that
rested for one second or longer and divide that value by the number of
orders that the member marked with the ELO attribute.\20\ Moreover, the
one second time frame would begin at the time the ELO order is entered
into the Nasdaq book and would conclude once the order is removed from
the Nasdaq book or modified by the participant or the Nasdaq
system.\21\ As proposed, any change to an order that would currently
result in the order losing priority (i.e., a change in the order's time
stamp) would, if applied to an ELO order, be considered an alteration
of the ELO order and stop the clock in terms of determining whether the
order rested on the book unaltered for at least one second.\22\ In this
vein, the Exchange stated that any type of update to an order that
creates a new time stamp for priority purposes would count as a
modification of the order and noted, by way of example, that each time
an ELO order is updated due to pegging,\23\ re-pricing, or reserve
replenishment, the one-second timer would restart.\24\ The Exchange
also stated that full cancellations would stop the timer.\25\ In
addition, a sub-second full or partial execution of an ELO order
resting on the Nasdaq book would not count as an order modification for
purposes of determining compliance with the ELO eligibility
requirements.\26\ Accordingly, a sub-second partial execution of an ELO
order would not reset the time from which the one second time frame is
measured for the remainder of the order.\27\ Likewise, a member's
reduction of the size of a resting ELO order prior to one second
elapsing also would not count as an alteration for purposes of
determining compliance with the ELO eligibility requirements.\28\
---------------------------------------------------------------------------

\20\ See Amendment No. 1.
\21\ See id. For an ELO order that Nasdaq routes upon receipt,
the one second time frame would begin if and when the order returns
to Nasdaq and is posted on the Nasdaq book. See id.
\22\ See id.
\23\ The Exchange illustrated through an example that each time
an ELO order with a primary or market pegging attribute has its
price updated, it would be considered a new order for purposes of
determining its resting time. See id. According to the Exchange,
each price update would be considered a separate order for
determining compliance with the ELO eligibility requirements. See
id.
\24\ See id.
\25\ See id.
\26\ See proposed Rule 4703(m); see also Amendment No. 1.
\27\ See Amendment No. 1.
\28\ See id.
---------------------------------------------------------------------------

As noted above, only displayed Designated Retail Orders would be
eligible for the ELO attribute, and if a Designated Retail Order with a
non-display attribute also is entered with the ELO attribute, the order
would be added to the Nasdaq book as a non-displayed order without
Extended Life Priority.\29\ By way of example, the Exchange noted that
an order with minimum quantity or midpoint pegging attributes would not
be able to receive Extended Life Priority because an order with either
of those attributes must be non-displayed.\30\ The Exchange also noted
that a reserve order has a displayed portion and non-displayed portion,
and the displayed portion of a reserve order with the ELO attribute
would be eligible to receive Extended Life Priority while the non-
displayed portion of the order would not.\31\ If the displayed portion
of such an order receives a full execution, the displayed quantity
would be replenished from the non-displayed reserve quantity, the
newly-replenished displayed size would receive a new time stamp and
Extended Life Priority based on that time stamp, and a new timer would
start for purposes of determining compliance with the one second
requirement.\32\
---------------------------------------------------------------------------

\29\ See proposed Rule 4703(m); see also supra note 15.
\30\ See Amendment No. 1.
\31\ See id.
\32\ See id.
---------------------------------------------------------------------------

As proposed, an order designated with the ELO attribute would only
have Extended Life Priority if it is ranked at its displayed price.
Specifically, proposed Rule 4703(m) would provide that an ELO order
that is adjusted by the Exchange system upon entry to be displayed on
the Nasdaq book at one price but ranked on the book at a different,
non-displayed price would be ranked without the ELO attribute at the
non-displayed price. If the Nasdaq system subsequently adjusts such an
order to be displayed and ranked on the Nasdaq book at the same price,
the order would be assigned Extended Life Priority and ranked on the
book in time priority among other orders with Extended Life Priority at
that price.\33\
---------------------------------------------------------------------------

\33\ See proposed Rule 4703(m).
---------------------------------------------------------------------------

Additionally, proposed Rule 4703(m) would provide that, for
purposes of the Nasdaq opening, closing, and halt crosses, all ELO
orders on the Nasdaq book upon initiation of a cross may participate in
such a cross and retain priority among orders posted on the Nasdaq book
that also participate in the

[[Page 32388]]

cross. Upon initiation of a cross, all ELO orders on the Nasdaq book
that are eligible to participate in a cross would be processed in
accordance with Rule 4752 (Opening Process), Rule 4753 (Nasdaq Halt
Cross), or Rule 4754 (Nasdaq Closing Cross), as applicable.\34\ ELO
orders that are held by the Nasdaq system for participation in the
opening or closing cross would not have Extended Life Priority in the
cross,\35\ but would be assigned Extended Life Priority if the order
joins the Nasdaq book upon completion of the cross.\36\ Any orders with
Extended Life Priority that are not executed in a cross would be ranked
on the Nasdaq book with Extended Life Priority.\37\
---------------------------------------------------------------------------

\34\ See id.
\35\ According to the Exchange, cross-specific orders marked
with the ELO attribute would be eligible to participate in the
Nasdaq opening, halt, and closing crosses, but they would be ranked
for purposes of a cross execution without the ELO attribute. See
Notice, 81 FR at 87631. By contrast, orders with the ELO attribute
that are ranked on the Nasdaq book (i.e., orders that are in the
continuous market) would retain Extended Life Priority for purposes
of a cross execution. See id. See also Amendment No. 1.
\36\ See proposed Rule 4703(m).
\37\ See id.
---------------------------------------------------------------------------

The Exchange stated that it would carefully monitor members' use of
the ELO attribute on a monthly basis and would not rely solely on a
member's attestation with regard to ELO usage.\38\ The Exchange also
stated that it would determine whether a member was in compliance with
the ELO eligibility requirements for a given month within five business
days of the end of that month.\39\ A member that does not meet the ELO
eligibility requirements for any given month would be ineligible to
receive Extended Life Priority for its orders in the month immediately
following the month in which it did not comply.\40\ Following the end
of the ineligible month, a member would once again be able to enter ELO
orders if it completes a new attestation.\41\ If a member fails to meet
the ELO eligibility requirements for a second time, its orders would
not be eligible for Extended Life Priority for the two months
immediately following the month in which it did not meet the
eligibility requirements for the second time.\42\ If a member fails to
meet the ELO eligibility requirements for a third time, it would no
longer be eligible to receive Extended Life Priority for its
orders.\43\ In addition, concurrently with the launch of the ELO
attribute, the Exchange would implement new surveillances to identify
any potential misuse of the ELO attribute.\44\ Moreover, any attempted
manipulation or misrepresentation of the nature of an ELO order (e.g.,
representing a non-retail order to be a Designated Retail Order) would
be a violation of Nasdaq's rules.\45\
---------------------------------------------------------------------------

\38\ See Amendment No. 1.
\39\ See id.
\40\ See id.; see also proposed new attachment B to the
Exchange's designated retail order attestation form at Exhibit 3 to
Amendment No. 1. The Exchange has stated that its system would
prevent a member that is not eligible to participate in the program
from entering orders that are flagged with Extended Life Priority
(including such designation on the port level). See Notice, 81 FR at
87630 n.17.
\41\ See Amendment No. 1; see also proposed new attachment B to
the Exchange's designated retail order attestation form at Exhibit 3
to Amendment No. 1.
\42\ Following the end of the ineligible months, a member would
once again be able to enter ELO orders if it completes a new
attestation. See Amendment No. 1; see also proposed new attachment B
to the Exchange's designated retail order attestation Form at
Exhibit 3 to Amendment No. 1.
\43\ See Amendment No. 1; see also proposed new attachment B to
the Exchange's designated retail order attestation form at Exhibit 3
to Amendment No. 1.
\44\ See Amendment No. 1.
\45\ See id. According to Nasdaq, like the current surveillances
it conducts, the new surveillances would identify potential
violative conduct that would be investigated by Nasdaq and FINRA,
and if the conduct is found to be violative, the offending member
would be subject to disciplinary action. See id. (citing the Nasdaq
Rule 9000 Series). See also infra notes 96-98 and accompanying text.
---------------------------------------------------------------------------

The Exchange has proposed to designate orders with the ELO
attribute with a new, unique identifier.\46\ Specifically, orders with
the ELO attribute may be individually designated with the new
identifier, or may be entered through an order port that has been set
to designate, by default, all orders with the new identifier.\47\
Orders marked with the new identifier--whether on an order-by-order
basis or via a designated port--would be disseminated via Nasdaq's
TotalView ITCH data feed.\48\
---------------------------------------------------------------------------

\46\ See Notice, 81 FR at 87630-31; see also proposed new
attachment B to the Exchange's designated retail order attestation
form at Exhibit 3 to Amendment No. 1.
\47\ See Notice, 81 FR at 87630-31; see also proposed new
attachment B to the Exchange's designated retail order attestation
form at Exhibit 3 to Amendment No. 1.
\48\ See Notice, 81 FR at 87630-31. The Exchange is not
proposing to disseminate the ELO identifier via the SIP data feeds.
See Amendment No. 1.
---------------------------------------------------------------------------

B. Additional Conforming Rule Changes

In connection with the proposed addition of Rule 4703(m), the
Exchange has proposed to make conforming changes to Rules
4702(b)(1)(C), (b)(2)(C), and (b)(4)(C) to indicate that the ELO
attribute may be assigned to price to comply, price to display, and
post-only orders, respectively. In addition, the Exchange has proposed
to amend Rules 4752 (Opening Process), 4753 (Nasdaq Halt Cross), and
4754 (Nasdaq Closing Cross) to incorporate ELO orders into the cross
execution priority hierarchies set forth in each of those rules.

C. Implementation

The Exchange has stated that it plans to implement the ELO
functionality for Designated Retail Orders in a measured manner.\49\
Specifically, the Exchange anticipates a rollout of the ELO
functionality, beginning with a small set of symbols and gradually
expanding further, and that it will publish the symbols that are
eligible for the ELO attribute on its Web site.\50\ According to the
Exchange, the exact implementation date would be reliant on several
factors, such as the results of extensive testing and industry events
and initiatives.\51\ The Exchange currently plans to implement the
initial set of symbols for ELO in the third quarter of 2017.\52\
---------------------------------------------------------------------------

\49\ See Amendment No. 1.
\50\ See id. The Exchange noted that, in symbols that are not
eligible for the ELO functionality, it would accept orders submitted
with the ELO attribute as non-ELO orders. See id.
\51\ See id.
\52\ See id. The Exchange stated that it would notify market
participants via an Equity Trader Alert once a specific date for the
initial rollout is determined. See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\53\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\54\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and that the rules are not designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers; and Section 6(b)(8) of the Act,\55\ which requires that the
rules of a national securities

[[Page 32389]]

exchange not impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

\53\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\54\ 15 U.S.C. 78f(b)(5).
\55\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

The Commission believes that the Exchange's proposed ELO
functionality should benefit retail investors by providing enhanced
order book priority to retail order flow that is not marketable upon
entry. Such enhanced order book priority could result in additional or
more immediate execution opportunities on the Exchange for resting
retail orders that otherwise would be farther down in the order book
queue, and thereby enhance execution opportunities for retail
investors.
As noted above, the Commission received eleven comment letters on
the proposed rule change,\56\ and two response letters from the
Exchange.\57\ One of the commenters expressed support for the proposal,
but encouraged additional safeguards to minimize the opportunity for
potential gaming of the ELO eligibility requirements.\58\ Other
commenters expressed concerns that focused on the availability of the
ELO attribute only to retail orders; the eligibility requirements for
the ELO attribute, including the attestation requirement and the
Exchange's methods for monitoring compliance and imposing discipline
for non-compliance; the identification of ELO orders in Nasdaq's market
data feed; and the potential conflict between the proposed ELO
eligibility requirements and other activities of the member.
---------------------------------------------------------------------------

\56\ See supra notes 6, 9, and 12. The IMC Letter broadly
supported the comments articulated in FIA PTG Letter I.
\57\ See supra notes 8 and 13.
\58\ See Virtu Letter. Another commenter also stated its strong
support for exchange innovation and providing additional choices for
retail orders, but expressed concern that the Exchange did not
propose strong enough penalties or controls to deter abuse on a
real-time basis. See BATS Letter at 1.
---------------------------------------------------------------------------

Four commenters expressed concern that the Exchange's proposal
would be unfairly discriminatory by providing the ELO functionality
only to retail orders.\59\ One commenter argued that the proposal would
unfairly burden competition because it would allow the Exchange to
compete for order flow by creating an order attribute that
inappropriately favors certain market participants at the expense of
others.\60\ Two commenters argued that the proposal is unnecessary,
stating that there is insufficient evidence that retail investors are
experiencing difficulty in obtaining fills for resting orders and
therefore would benefit from the proposed functionality.\61\
---------------------------------------------------------------------------

\59\ See FIA PTG Letter I at 3-4; Hudson River Trading Letter at
2; Citadel Letter I at 4; Citadel Letter II at 1 and 4; IMC Letter.
Three commenters also expressed general concerns with respect to the
potential expansion of the ELO functionality beyond retail orders,
or noted that their concerns regarding the enhanced priority
provided to retail orders under the proposal could be exacerbated in
connection with any such expansion. See BATS Letter at 1; Citadel
Letter I at 6; FIA PTG Letter I at 6. In response to these concerns,
the Exchange noted that any future expansion of the ELO
functionality beyond retail orders would be subject to a separate
rule filing with the Commission. See Nasdaq Response Letter I at 7.
See also Amendment No. 1.
\60\ See Citadel Letter I at 4.
\61\ See FIA PTG Letter I at 2-3; Citadel Letter I at 1-2;
Citadel Letter II at 4-5.
---------------------------------------------------------------------------

Four commenters also expressed concern that the proposal would
increase equity market structure complexity, create uncertainty
regarding the priority of resting orders, and negatively impact market
liquidity and price discovery.\62\ According to these commenters, the
increased uncertainty among liquidity providers would result in wider
spreads, which would adversely impact long-term investors, including
institutional and retail investors.\63\ One of these commenters
suggested that the proposal would negatively impact market makers'
hedging strategies in ETFs and their underlying securities, and the
associated risk and cost would be borne by institutional and retail
investors.\64\ Another commenter argued that ELO orders should not
receive priority over other orders that have already been resting for
at least one second, and that doing so would discourage other market
participants from displaying liquidity.\65\
---------------------------------------------------------------------------

\62\ See Citadel Letter I at 3-7; Citadel Letter II at 4-5; FIA
PTG Letter I at 1-3 and 5-6; FIA PTG Letter II at 1-2; Hudson River
Letter at 2-3; IMC Letter.
\63\ See Citadel Letter I at 3-4; Citadel Letter II at 4; FIA
PTG Letter I at 5.
\64\ See Citadel Letter I at 3.
\65\ See Hudson River Trading Letter at 2-3.
---------------------------------------------------------------------------

In response, the Exchange stated its belief that the growth in
internalization and the speed of execution has required differentiation
of retail orders, which are typically entered by long-term investors,
from those of other market participants.\66\ The Exchange noted that
the proposal is an effort to promote displayed orders with longer time
horizons to enhance the market so that it works better for a wider
array of market participants.\67\ According to the Exchange, unlike
professional market makers and automated liquidity providers, who
commonly invest in low-latency technology to facilitate efficient order
book placement, retail investors generally have a longer investment
horizon, do not necessarily monitor market changes over very short time
periods, and generally have not focused on efficient order queue
placement of displayed orders.\68\ As a result, the Exchange believes
that its current price/display/time priority structure may limit retail
investors from effectively participating on the Exchange, particularly
in highly-liquid securities where the sequence of order arrival is
important to participation in ensuing transactions on the Nasdaq order
book.\69\ The Exchange also noted that providing the proposed ELO
functionality to retail investors would help improve execution quality
and retail participation in on-exchange transactions, which should
improve overall market quality on the Exchange.\70\ According to the
Exchange, an increase in participation from the retail segment of the
market would increase the diversity of the marketplace and thereby
improve general market function and price discovery.\71\ Further, the
Exchange stated that providing a mechanism by which retail orders may
have an increased chance of execution on the Exchange would promote
competition among the Exchange, its exchange peers, and off-exchange
trading venues.\72\
---------------------------------------------------------------------------

\66\ See Amendment No. 1.
\67\ The Exchange also noted that the proposal would provide
firms handling retail order flow with additional options to consider
when determining the best way to represent and execute retail non-
marketable limit orders. See Nasdaq Response Letter I at 3. In
addition, the Exchange argued that the proposal would benefit
publicly traded companies by promoting long-term investment in
corporate securities. See id. at 2.
\68\ See Amendment No. 1.
\69\ See Notice, 81 FR at 87630; see also Amendment No. 1.
\70\ See Nasdaq Response Letter I at 3 and 7; Nasdaq Response
Letter II at 6-7.
\71\ See Amendment No. 1. In particular, the Exchange stated its
belief that markets and price discovery best function through the
interactions of a diverse set of market participants. See id. The
Exchange also stated its belief that robust price discovery is best
served when there are many different perspectives on what the price
and timing of a transaction should be. See id.
\72\ See Nasdaq Response Letter I at 7.
---------------------------------------------------------------------------

The Commission recognizes that market participants generally
distinguish individual retail investors from professional traders, and
that retail investors are presumed to be less informed than
professional traders. Recognizing this distinction, the Commission
believes that the Exchange's proposal to provide the ELO functionality
only to Designated Retail Orders is consistent with the Act. In
particular, the Commission believes that the Exchange's proposal
represents a reasonable effort to enhance the ability of retail trading
interest to participate effectively on an exchange without
discriminating unfairly against other

[[Page 32390]]

market participants or inappropriately or unnecessarily burdening
competition.
The Commission also does not share the concern expressed by some
commenters that the proposed ELO functionality would have a detrimental
market impact, such as by causing wider spreads. The Commission
believes that the proposal could lead to increased or more immediate
execution opportunities on the Exchange for resting retail orders.
Moreover, given that the ELO attribute would only be available for
Designated Retail Orders that are displayed, to the extent that
Exchange members send more retail interest to the Exchange due to the
availability of the ELO functionality, this could translate into more
displayed retail interest on the Exchange. If the ELO functionality
contributes to greater displayed liquidity on the Exchange, this may
benefit all market participants by improving the price discovery
process. In addition, due to the greater likelihood that retail orders
would have priority at the prevailing inside market as a result of the
ELO functionality, the proposal may in fact encourage tighter spreads
and price formation because non-retail liquidity providers may need to
quote more aggressively than the prevailing market in order to gain
priority.
With regard to the Exchange's proposed eligibility requirements for
the ELO attribute, four commenters expressed concern that the
Exchange's initial proposal to monitor for compliance with the ELO
eligibility requirements on a quarterly basis would be insufficient to
appropriately surveil for misuse of the functionality.\73\ Two of these
commenters advocated for stronger or more immediate penalties for
failure to comply with the ELO eligibility requirements.\74\
Specifically, one commenter noted that the Exchange should monitor for
and penalize abuse on an intra-quarter basis, and that the proposal
should impose stronger penalties to deter abuse.\75\ The other
commenter opined that the Exchange should conduct weekly reviews and
that a participant should be prohibited from utilizing the ELO
functionality after two weeks of non-compliance.\76\ Moreover, two
commenters suggested that the Exchange should automate the one second
resting time for ELO orders.\77\
---------------------------------------------------------------------------

\73\ See BATS Letter at 1-2; Citadel Letter I at 4; Themis
Letter I at 2-3; Virtu Letter at 2.
\74\ See BATS Letter at 2; Virtu Letter at 2.
\75\ See BATS Letter at 1-2.
\76\ See Virtu Letter at 2.
\77\ See FIA PTG Letter I at 5; Themis Letter I at 3.
---------------------------------------------------------------------------

In addition, three commenters argued that, under the proposed
attestation requirement, a participant could game the 99% threshold by
improperly inflating its number of compliant ELO orders, such as by
submitting a large number of non-marketable ELO Orders, while
impermissibly benefiting from its non-compliant 1% of ELO Orders.\78\
One of these commenters also stated that the Exchange has not provided
sufficient clarity regarding how it would calculate whether at least
99% of a member's ELO orders have rested unaltered on the Nasdaq book
for a minimum of one second.\79\ Further, two commenters expressed
concern that the Exchange has not sufficiently limited the definition
of ``Designated Retail Order'' for purposes of the proposed
functionality to truly capture retail investors and to prevent misuse
of the definition.\80\
---------------------------------------------------------------------------

\78\ See FIA PTG Letter I at 4; Citadel Letter I at 6; IEX
Letter at 2.
\79\ See FIA PTG Letter I at 4. See also IMC Letter.
\80\ See FIA PTG Letter I at 4; Citadel Letter I at 4-5.
---------------------------------------------------------------------------

In response, the Exchange amended its proposal to add additional
detail regarding the ELO functionality, including how the proposed one-
second timer would operate and how the 99% threshold would be
calculated, as well as to shorten the review period for determining
compliance with the eligibility requirements from a quarterly review to
a monthly review period.\81\ The Exchange also stated that it believes
its proposed 99% threshold is appropriate, noting that the standard
would require ``near perfect performance'' while allowing some
flexibility in the event any unforeseen issues may result in de minimis
non-compliance.\82\ Further, the Exchange stated that it would
establish new surveillances to detect potential misuse of the proposed
functionality and noted that any attempt to game or otherwise abuse the
ELO functionality would be a violation of the Exchange's rules and
would subject the member to potential disciplinary action.\83\
---------------------------------------------------------------------------

\81\ See Nasdaq Response Letter I at 4 and Amendment No. 1. See
also supra notes 20-28 and 38-43 and accompanying text.
\82\ See Nasdaq Response Letter I at 4.
\83\ See id. See also supra notes 44-45 and accompanying text.
---------------------------------------------------------------------------

In addition, the Exchange stated that the definition of Designated
Retail Order is clear that the member entering such an order must have
policies and procedures designed to ensure that the order complies with
the requirements of the definition, including that the order originate
from a natural person.\84\ The Exchange also stated that the definition
of Designated Retail Order allows for orders to originate from
organizations in very limited circumstances.\85\ The Exchange noted
that, accordingly, it does not believe that there is latitude for a
member to legally represent itself as eligible to enter an order with
ELO priority when the order does not fit within the definition of
Designated Retail Order.\86\
---------------------------------------------------------------------------

\84\ See Nasdaq Response Letter I at 6. See also Rule 7018
(defining ``Designated Retail Order'').
\85\ See Nasdaq Response Letter I at 6.
\86\ See id.
---------------------------------------------------------------------------

One commenter asserted that the increased frequency of monitoring
proposed in Amendment No. 1 did not address its concerns with the
Exchange's proposed monitoring and enforcement mechanisms.\87\ This
commenter stated that the Exchange has not offered any specifics about
its proposed new surveillance mechanisms, and that the proposed
penalties for misuse of the ELO attribute would not address the problem
that other market participants that traded with non-compliant ELO
orders were doing so under false assumptions.\88\ Another commenter was
supportive of the changes proposed in Amendment No. 1 (i.e., shortening
of the review period from quarterly to monthly; addition of details
regarding how the ELO eligibility requirements operate; and development
of new surveillances to detect potential misuse of the ELO attribute),
but noted that the amendment and the Exchange's response did not fully
alleviate its specific concerns regarding the definition of
``Designated Retail Order'' and the potential for gaming.\89\
Similarly, one commenter noted that the Exchange has not explained how
highly sophisticated day traders or other professional traders who are
natural persons would be prevented from utilizing the ELO
attribute.\90\
---------------------------------------------------------------------------

\87\ See IEX Letter at 3.
\88\ See id. at 2-3.
\89\ See FIA PTG Letter II at 2.
\90\ See Citadel Letter I at 4-5; Citadel Letter II at 3.
---------------------------------------------------------------------------

In reply, the Exchange noted that its proposed rules are properly
designed to maintain compliance and that it would actively enforce the
proposed rules to achieve compliance.\91\ The Exchange also asserted
that, because a market participant's broker-dealer would make the
determination to enter an order as ELO, if a professional trader were
to make consistent sub-second cancellations of its orders, presumably
the broker-dealer would determine that orders entered by this customer
are not best suited for ELO usage.\92\ Finally, the Exchange reiterated
that it would monitor behavior to ensure that market participants are
not taking steps to

[[Page 32391]]

circumvent the letter, intent, or spirit of the rule.\93\
---------------------------------------------------------------------------

\91\ See Nasdaq Response Letter II at 5-6.
\92\ See id. at 6.
\93\ See id.
---------------------------------------------------------------------------

The Commission believes that the proposal is reasonably designed to
ensure that the eligibility criteria for ELO usage are followed
appropriately and to prevent fraudulent and manipulative acts and
practices. In this regard, the Commission believes that the measures
the Exchange has represented that it would take in order to address
member non-compliance with the ELO eligibility criteria, and to surveil
for, investigate, and punish misuse or gaming of the ELO functionality,
are sufficient to encourage members to take all reasonable steps
necessary to comply with the ELO eligibility criteria and provide
sufficient deterrence to members who otherwise would abuse the
functionality. In particular, the Commission notes that the Exchange
has represented that it will carefully monitor its members' use of the
ELO attribute on a monthly basis and not rely solely on a member's
attestation with regard to ELO usage.\94\ If a member does not comply
with the ELO eligibility requirements, it will face suspension, and
ultimately prohibition, from ELO usage.\95\ The Exchange also has
proposed to implement new surveillances that are designed to identify
any potential misuse of the ELO attribute.\96\ Any potentially
violative conduct identified by the new surveillances would be
investigated.\97\ If the conduct is found to be violative, the
offending member(s) would be subject to disciplinary action.\98\ The
Commission notes that disciplinary actions could result in penalties
that are in addition to the suspension or prohibition of ELO usage.
---------------------------------------------------------------------------

\94\ See Amendment No. 1. The attestation form for ELO usage
would require the member to attest, among other things, that it has
implemented policies and procedures that are reasonably designed to
ensure that substantially all orders designated by the member as
Designated Retail Orders comply with the requirements for such
orders. See Notice, 81 FR at 87630 n.15; see also Amendment No. 1
and the designated retail order attestation form at Exhibit 3 to
Amendment No. 1.
\95\ See Amendment No. 1; see also proposed new attachment B to
the Exchange's designated retail order attestation form at Exhibit 3
to Amendment No. 1.
\96\ See Amendment No. 1.
\97\ See id.
\98\ See id. and supra note 45 and accompanying text; see also
Nasdaq Rule 9000 Series.
---------------------------------------------------------------------------

With regard to the identification of ELO orders in Nasdaq's
TotalView ITCH market data feed, four commenters expressed concern that
the proposed ELO order identifier would reveal to market participants
that certain orders are retail orders and must remain unaltered for at
least one second.\99\ Two of these commenters noted that, through the
process of elimination, market participants also would be able to
identify the preponderance of other quotes as coming from institutions
or professional market makers.\100\ One of these commenters also
contended, however, that not tagging ELO orders would prevent liquidity
providers from being able to identify their place in the queue, and
that this uncertainty would lead to wider spreads and smaller order
size.\101\
---------------------------------------------------------------------------

\99\ See Citadel Letter I at 5; FIA PTG Letter I at 5; Themis
Letter I at 1-2; IEX Letter at 1-2.
\100\ See FIA PTG Letter I at 5; IEX Letter at 1-2.
\101\ See FIA PTG Letter I at 5.
---------------------------------------------------------------------------

The Exchange stated that it does not believe that information
leakage is a concern with respect to the current proposal because the
ELO functionality would be available only to retail orders, and retail
investor interest is most often represented by one order at a single
price.\102\ In addition, according to the Exchange, the identification
of ELO orders in the Exchange's TotalView ITCH market data feed would
provide transparency that would be valuable for the industry in
evaluating the efficacy of the proposal.\103\
---------------------------------------------------------------------------

\102\ See Nasdaq Response Letter I at 6-7. The Exchange
acknowledged that information leakage could be a concern for some
non-retail market participants who may build or unwind significant
trading positions or engage in proprietary and confidential trading
strategies, and that it may be an issue if the ELO attribute were to
be applied as currently proposed to non-retail market participant
orders. See id. at 6.
\103\ See id. at 7.
---------------------------------------------------------------------------

One commenter disagreed with the Exchange's argument that
information leakage would not be a concern with respect to retail
orders.\104\ This commenter suggested that with knowledge that an order
has selected the ELO attribute, a market participant may choose to
route to that order last, knowing it would have to remain unaltered for
at least one second, which could provide lower fill rates for ELO
orders if the market participant is able to complete its order on other
venues before routing to Nasdaq to interact with the ELO order.\105\
This commenter also suggested that it is not clear how a retail
investor could opt out of the ELO functionality in light of the fact
that Nasdaq would permit Exchange members to designate all orders
submitted through a particular entry port as ELO orders.\106\ Two other
commenters asserted that the Exchange's response does not address the
concern that the ELO identifier could help market participants identify
institutional investor orders.\107\
---------------------------------------------------------------------------

\104\ See Citadel Letter II at 2.
\105\ See id.
\106\ See id. See also FIA PTG Letter I at 3 (stating that the
decision whether to classify order flow as ELO would be made by
brokers, not their retail customers).
\107\ See IEX Letter at 1-2; Themis Letter II at 2.
---------------------------------------------------------------------------

In reply, the Exchange asserted that the proposal would create
transparency, not information leakage.\108\ According to the Exchange,
transparency differs from information leakage because it is purposeful,
equally visible to all, and fully disclosed in public rule proposals,
whereas information leakage is generally understood to be inadvertent,
selective, and secretive.\109\ The Exchange also reiterated that ELO is
a voluntary feature, and its use can be quickly discontinued (and must
be quickly discontinued if necessary to comply with the duty of best
execution) if ELO orders produce negative results.\110\
---------------------------------------------------------------------------

\108\ See Nasdaq Response Letter II at 3-4.
\109\ See id. at 4.
\110\ See id.
---------------------------------------------------------------------------

In addition, the Exchange did not share the concern that the
identification of ELO orders on the Exchange's data feed could affect
routing strategies and lead to lower fill rates for ELO orders.
According to the Exchange, most members utilize transaction cost
analytic tools to evaluate and measure the related impact of an
execution by weighing opportunity cost and market impact.\111\ The
Exchange stated that it expects that, as a result of ELO, Nasdaq
execution quality metrics will improve over time and members will
adjust routing behavior to ensure a higher degree of interaction with
the Nasdaq book.\112\
---------------------------------------------------------------------------

\111\ See id.
\112\ See id.
---------------------------------------------------------------------------

The Exchange also stated that the identification of ELO orders
would not allow market participants to say with any assurance that all
other orders are of a particular participant type because not all
retail orders will be designated as ELO.\113\ The Exchange also noted
that retail market participants tend to invest in certain heavily-
traded securities, which do not lend themselves to easy identification
of the nature of the market participant behind the order.\114\
---------------------------------------------------------------------------

\113\ See id.
\114\ See id. at 4-5. The Exchange also addressed the statement
made by a commenter that consumers of the Exchange's proprietary
data feeds already have information that can be used to identify
which orders are submitted by electronic trading firms. The Exchange
sought to correct this statement because its TotalView ITCH market
data feed supports voluntary market marker identification or
``attribution,'' which is used to allow identification of market
maker quotes and orders to meet their quoting obligations. According
to the Exchange, this specification is not limited to any type of
market participant, and is wholly voluntary. See id. at 7.

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

[[Page 32392]]

The Commission believes that market participants (retail and non-
retail) are not likely to be detrimentally affected by other market
participants' knowledge, via the ELO identifier, that certain orders
originated from retail investors and must remain unchanged for at least
one second. In particular, information leakage would likely not be a
concern for retail interest because retail interest is most often
represented by one order at a single price.\115\ Also, the lack of an
ELO attribute on any particular order would likely not allow market
participants to say with any assurance that the order is of a
particular participant type.\116\ Moreover, the Commission does not
believe that identification of ELO orders would necessarily result in
market participants choosing to route to ELO orders last and therefore
result in lower fill rates for these orders.\117\ In addition, the
Commission notes that the use of the ELO attribute is voluntary.
---------------------------------------------------------------------------

\115\ See supra note 102 and accompanying text.
\116\ See supra notes 113-114 and accompanying text.
\117\ See supra note 105 and accompanying text.
---------------------------------------------------------------------------

Finally, one commenter suggested that the proposal could create a
conflict with FINRA Rule 5320, commonly known as the Manning rule.\118\
According to the commenter, if a broker-dealer has routed a customer
ELO order to Nasdaq but is required to pull that ELO order within one
second and fill it to comply with its obligations under FINRA Rule
5320, that broker-dealer could become out of compliance with the ELO
requirements and, as a result, its retail customer limit orders could
be disadvantaged vis-[aacute]-vis other broker-dealers' retail customer
limit orders.\119\ This commenter also asserted that an Exchange member
may receive a sub-second cancellation request from a customer, which
could cause the member to fall under the 99% threshold and become
ineligible to submit ELO orders on behalf of other customers.\120\
---------------------------------------------------------------------------

\118\ See Citadel Letter I at 2. FINRA Rule 5320(a) states that
``[e]xcept as provided herein, a member that accepts and holds an
order in an equity security from its own customer or a customer of
another broker-dealer without immediately executing the order is
prohibited from trading that security on the same side of the market
for its own account at a price that would satisfy the customer
order, unless it immediately thereafter executes the customer order
up to the size and at the same or better price at which it traded
for its own account.''
\119\ See Citadel Letter I at 2.
\120\ See id. at 5.
---------------------------------------------------------------------------

In response, the Exchange stated that the Manning obligations of a
member using the ELO functionality would be no different from the
obligations on an OTC market maker that internalizes orders and relies
on the ``no-knowledge'' exception to separate its proprietary trading
from its handling of customer orders.\121\ The Exchange stated that
this exception should be equally applicable to a member using the ELO
functionality.\122\ The Exchange also noted that it believes that
retail investor limit orders that are posted on the Exchange will
generally not be cancelled in a short period of time such as one
second, because retail investors tend to have long-term investment
goals and increasing the chance of receiving an execution is worth the
risk of their order resting for one second or longer.\123\
---------------------------------------------------------------------------

\121\ See Nasdaq Response Letter I at 5. See also Supplementary
Material .02 to FINRA Rule 5320.
\122\ See Nasdaq Response Letter I at 5.
\123\ See id. at 4. See also FIA PTG Letter I at 3 (stating that
most retail participants do not cancel orders within one second).
---------------------------------------------------------------------------

In response to the Exchange, the commenter disputed the Exchange's
assertion that the ``no knowledge'' exception to the Manning rule
should address its concern, noting that it would persist where a firm
may choose not to use the ``no-knowledge'' exception in order to
provide higher fill rates or price improvement opportunities to its
customers.\124\ In reply, the Exchange noted that this scenario posited
by the commenter is representative of a voluntary strategy used by the
broker-dealer, and that the broker-dealer is not compelled to use
ELO.\125\
---------------------------------------------------------------------------

\124\ See Citadel Letter II at 3-4.
\125\ See Nasdaq Response Letter II at 7.
---------------------------------------------------------------------------

The Commission does not believe that the commenter's assertion that
broker-dealers could be conflicted in their ability to utilize the ELO
functionality and also comply with their obligations under FINRA Rule
5320 is a basis for finding that the Exchange's proposal is
inconsistent with the Act. As the Exchange noted, the ``no-knowledge''
exception to FINRA Rule 5320 could be applicable to an Exchange member
using the ELO functionality.\126\ To the extent firms choose not to
rely on the ``no-knowledge'' exception, any limitation on such firms'
ability to utilize the ELO functionality and resulting effect on their
ability to compete with other broker-dealers that handle retail order
flow would stem from the firms' business judgment, not the eligibility
criteria for ELO attribute usage, which apply uniformly to any Exchange
member seeking to utilize the ELO functionality.
---------------------------------------------------------------------------

\126\ See Nasdaq Response Letter I at 5. See also Supplementary
Material .02 to FINRA Rule 5320.
---------------------------------------------------------------------------

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\127\ that the proposed rule change (SR-NASDAQ-2016-161), as
modified by Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

\127\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\128\
Eduardo A. Aleman,
Assistant Secretary.
---------------------------------------------------------------------------

\128\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2017-14666 Filed 7-12-17; 8:45 am]
BILLING CODE 8011-01-P

32392 Federal Register / Vol. 82, No. 133 / Thursday, July 13, 2017 / Notices

The Commission believes that market knowledge’’ exception to separate its IV. Conclusion
participants (retail and non-retail) are proprietary trading from its handling of It is therefore ordered, pursuant to
not likely to be detrimentally affected by customer orders.121 The Exchange stated Section 19(b)(2) of the Act,127 that the
other market participants’ knowledge, that this exception should be equally proposed rule change (SR–NASDAQ–
via the ELO identifier, that certain applicable to a member using the ELO 2016–161), as modified by Amendment
orders originated from retail investors functionality.122 The Exchange also No. 1, be, and hereby is, approved.
and must remain unchanged for at least noted that it believes that retail investor
one second. In particular, information For the Commission, by the Division of
limit orders that are posted on the Trading and Markets, pursuant to delegated
leakage would likely not be a concern Exchange will generally not be authority.128
for retail interest because retail interest cancelled in a short period of time such Eduardo A. Aleman,
is most often represented by one order as one second, because retail investors
at a single price.115 Also, the lack of an Assistant Secretary.
tend to have long-term investment goals [FR Doc. 2017–14666 Filed 7–12–17; 8:45 am]
ELO attribute on any particular order
and increasing the chance of receiving
would likely not allow market BILLING CODE 8011–01–P
an execution is worth the risk of their
participants to say with any assurance
that the order is of a particular order resting for one second or
participant type.116 Moreover, the longer.123 SECURITIES AND EXCHANGE
Commission does not believe that In response to the Exchange, the COMMISSION
identification of ELO orders would commenter disputed the Exchange’s [Release No. 34–81094; File No. SR–ISE–
necessarily result in market participants assertion that the ‘‘no knowledge’’ 2017–72]
choosing to route to ELO orders last and exception to the Manning rule should
therefore result in lower fill rates for address its concern, noting that it would Self-Regulatory Organizations; Nasdaq
these orders.117 In addition, the persist where a firm may choose not to ISE, LLC; Notice of Filing and
Commission notes that the use of the use the ‘‘no-knowledge’’ exception in Immediate Effectiveness of Proposed
ELO attribute is voluntary. order to provide higher fill rates or price Rule Change To Extend the SPY Pilot
Finally, one commenter suggested improvement opportunities to its Program
that the proposal could create a conflict customers.124 In reply, the Exchange July 7, 2017.
with FINRA Rule 5320, commonly noted that this scenario posited by the
known as the Manning rule.118 Pursuant to Section 19(b)(1) of the
commenter is representative of a
According to the commenter, if a broker- Securities Exchange Act of 1934 (the
voluntary strategy used by the broker-
dealer has routed a customer ELO order ‘‘Act’’),1 and Rule 19b–4 thereunder,2
dealer, and that the broker-dealer is not notice is hereby given that on July 5,
to Nasdaq but is required to pull that
compelled to use ELO.125 2017, Nasdaq ISE, LLC (‘‘ISE’’ or
ELO order within one second and fill it
to comply with its obligations under The Commission does not believe that ‘‘Exchange’’) filed with the Securities
FINRA Rule 5320, that broker-dealer the commenter’s assertion that broker- and Exchange Commission (‘‘SEC’’ or
could become out of compliance with dealers could be conflicted in their ‘‘Commission’’) the proposed rule
the ELO requirements and, as a result, ability to utilize the ELO functionality change as described in Items I and II
its retail customer limit orders could be and also comply with their obligations below, which Items have been prepared
disadvantaged vis-á-vis other broker- under FINRA Rule 5320 is a basis for by the Exchange. The Commission is
dealers’ retail customer limit orders.119 finding that the Exchange’s proposal is publishing this notice to solicit
This commenter also asserted that an inconsistent with the Act. As the comments on the proposed rule change
Exchange member may receive a sub- Exchange noted, the ‘‘no-knowledge’’ from interested persons.
second cancellation request from a exception to FINRA Rule 5320 could be I. Self-Regulatory Organization’s
customer, which could cause the applicable to an Exchange member Statement of the Terms of the Substance
member to fall under the 99% threshold using the ELO functionality.126 To the of the Proposed Rule Change
and become ineligible to submit ELO extent firms choose not to rely on the
orders on behalf of other customers.120 The Exchange proposes to mend its
‘‘no-knowledge’’ exception, any rules to extend the pilot program that
In response, the Exchange stated that limitation on such firms’ ability to
the Manning obligations of a member eliminated position and exercise limits
utilize the ELO functionality and for physically-settled options on the
using the ELO functionality would be resulting effect on their ability to
no different from the obligations on an SPDR S&P ETF Trust (‘‘SPY’’) (‘‘SPY
compete with other broker-dealers that Pilot Program’’).
OTC market maker that internalizes
handle retail order flow would stem The text of the proposed rule change
orders and relies on the ‘‘no-
from the firms’ business judgment, not is available on the Exchange’s Web site
115 See supra note 102 and accompanying text. the eligibility criteria for ELO attribute at www.ise.com, at the principal office
116 See supra notes 113–114 and accompanying usage, which apply uniformly to any of the Exchange, and at the
text. Exchange member seeking to utilize the Commission’s Public Reference Room.
117 See supra note 105 and accompanying text. ELO functionality.
118 See Citadel Letter I at 2. FINRA Rule 5320(a) II. Self-Regulatory Organization’s
states that ‘‘[e]xcept as provided herein, a member
121 See Nasdaq Response Letter I at 5. See also
Statement of the Purpose of, and
that accepts and holds an order in an equity Statutory Basis for, the Proposed Rule
security from its own customer or a customer of Supplementary Material .02 to FINRA Rule 5320.
Change
sradovich on DSK3GMQ082PROD with NOTICES

another broker-dealer without immediately 122 See Nasdaq Response Letter I at 5.
executing the order is prohibited from trading that 123 See id. at 4. See also FIA PTG Letter I at 3 In its filing with the Commission, the
security on the same side of the market for its own
account at a price that would satisfy the customer
(stating that most retail participants do not cancel Exchange included statements
orders within one second).
order, unless it immediately thereafter executes the
124 See Citadel Letter II at 3–4. 127 15
customer order up to the size and at the same or U.S.C. 78s(b)(2).
better price at which it traded for its own account.’’ 125 See Nasdaq Response Letter II at 7. 128 17CFR 200.30–3(a)(12).
119 See Citadel Letter I at 2. 126 See Nasdaq Response Letter I at 5. See also 1 15 U.S.C. 78s(b)(1).
120 See id. at 5. Supplementary Material .02 to FINRA Rule 5320. 2 17 CFR 240.19b–4.

VerDate Sep<11>2014 17:41 Jul 12, 2017 Jkt 241001 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 E:\FR\FM\13JYN1.SGM 13JYN1

Document Created: 2017-07-13 01:00:45
Document Modified: 2017-07-13 01:00:45

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		82 FR 32386