83 FR 60514 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Introduce a New Midpoint Trade Now Functionality

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 227 (November 26, 2018)

[Federal Register Volume 83, Number 227 (Monday, November 26, 2018)]
[Notices]
[Pages 60514-60516]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-25598]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84621; File No. SR-NASDAQ-2018-090]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Introduce a New Midpoint Trade Now Functionality

November 19, 2018.
    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 9, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 4702 (Order Types) and Rule 
4703 (Order Attributes) to introduce a new Midpoint Trade Now 
functionality.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 4702 (Order Types) and Rule 
4703 (Order Attributes) to introduce a new Midpoint Trade Now 
functionality.\3\ Midpoint Trade Now will be an Order Attribute \4\ 
that allows a resting Order that becomes locked at its non-displayed 
price by an incoming Midpoint Peg Post-Only Order \5\ to automatically 
execute against that Midpoint Peg Post-Only Order as a liquidity taker. 
Any remaining shares of the resting Order will remain posted on the 
Nasdaq Book with the same priority. The Midpoint Trade Now Order 
Attribute may be enabled on a port level basis for all Order Types that 
support it and, for the Non-Displayed Order Type, also on an order-by-
order basis. Midpoint Trade Now will be available for all Order entry 
protocols except for QIX.\6\
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    \3\ The term ``Order'' means an instruction to trade a specified 
number of shares in a specified System Security submitted to the 
Nasdaq Market Center by a Participant. An ``Order Type'' is a 
standardized set of instructions associated with an Order that 
define how it will behave with respect to pricing, execution, and/or 
posting to the Nasdaq Book when submitted to Nasdaq. An ``Order 
Attribute'' is a further set of variable instructions that may be 
associated with an Order to further define how it will behave with 
respect to pricing, execution, and/or posting to the Nasdaq Book 
when submitted to Nasdaq. The available Order Types and Order 
Attributes, and the Order Attributes that may be associated with 
particular Order Types, are described in Rules 4702 and 4703. One or 
more Order Attributes may be assigned to a single Order; provided, 
however, that if the use of multiple Order Attributes would provide 
contradictory instructions to an Order, the System will reject the 
Order or remove non-conforming Order Attributes. See Rule 4701(e).
    \4\ Id.
    \5\ A Midpoint Peg Post-Only Order is an Order Type with a Non-
Display Order Attribute that is priced at the midpoint between the 
NBBO and that will execute upon entry only in circumstances where 
economically beneficial to the party entering the Order. See Rule 
4702(b)(5).
    \6\ Nasdaq notes that, although the QIX protocol can support the 
removing of liquidity, QIX is designed to provide two-sided quote 
messages to the trading system, unlike the OUCH, RASH, FLITE and FIX 
protocols, which are designed to facilitate Order submission. See 
Item II.B. discussion, infra.
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    The Exchange is proposing to offer the Midpoint Trade Now 
instruction for all Orders that have the Non-Displayed Order Attribute 
\7\ and are not otherwise subject to restrictions on execution. 
Accordingly, the Midpoint Trade Now instruction shall not be available 
for Price to Display Orders (Rule 4702(b)(2)), Market Maker Peg Orders 
(Rule 4702(b)(7)), Supplemental Orders (Rule 4702(b)(6)), Market On 
Open Orders (Rule 4702(b)(8)), Limit On Open Orders (Rule 4702(b)(9)), 
Opening Imbalance Only Orders (Rule 4702(b)(10)), Market On Close 
Orders (Rule 4702(b)(11)), Limit on Close Orders (Rule 4702(b)(12)), 
Imbalance Only Orders (Rule 4702(b)(13)), and Midpoint Extended Life 
Orders (Rule 4702(b)(14)). These order types are either: (a) Ancapable 
of having a non-displayed price, hence the use of the Midpoint Trade 
Now instruction is not applicable, or b) subject to other Nasdaq rules 
regarding the display and execution of those orders, thus the use of 
the Midpoint Trade Now instruction would be inconsistent with those 
other Nasdaq rules.\8\ The Midpoint Trade-

[[Page 60515]]

Now instruction will be available as a port-setting for all other Order 
Types, namely Price to Comply Orders (Rule 4702(b)(1)), Non-Displayed 
Orders (Rule 4702(b)(3)), Post Only Orders (Rule 4702(b)(4)) and 
Midpoint Peg Post-Only Orders (Rule 4702(b)(5)). In addition, Midpoint 
Trade Now will be available on an Order-by-Order basis \9\ for Non-
Displayed Orders.\10\
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    \7\ There is both a Non-Display Order Attribute (Rule 4703(k)) 
and a Non-Display Order (Rule 4702(b)(3)).
    \8\ For example, a Supplemental Order is an order type with a 
Non-Display Order attribute that is held on the Nasdaq Book in order 
to provide liquidity at the NBBO through a special execution process 
described in Rule 4757(a)(1)(D). Rule 4757(a)(1)(D) provides that a 
Supplemental Order will be matched against an order only at the 
National Best Bid or Offer, and only if the size of the order is 
less than or equal to the aggregate size of Supplemental Order 
interest available at the price of the order. In addition, a 
Supplemental Order will not execute if the NBBO is locked or 
crossed. See Rule 4757(a)(1)(D). To the extent that a Supplemental 
Order will only be matched at the National Best Bid or Offer, and 
the Midpoint Trade-Now instruction allows a locked resting order to 
execute at a price that is potentially better than the NBBO, the 
function of the Trade-Now [sic] instruction is inconsistent with the 
function of the Supplemental Order.
    \9\ If a port is set to not use Midpoint Trade Now and a Non-
Displayed Order is sent with a Midpoint Trade Now specification 
through the port, the Order's instructions will override the port 
setting.
    \10\ While the port-level setting applies to Orders with a Non-
Displayed Order Attribute, order-by-order specification is available 
only for the Orders with the specific Non-Displayed Order Type.
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    A resting Order that is entered with the Midpoint Trade Now Order 
Attribute will execute against locking interest automatically. As such, 
the availability of Midpoint Trade Now obviates the need for execution 
restrictions on incoming Orders because when a resting Order without 
the Midpoint Trade Now Order Attribute is being locked at its non-
displayed price by a Midpoint Peg Post-Only Order, new incoming Orders 
(with or without the Midpoint Trade Now Attribute, as applicable) will 
be able to execute against the Midpoint Peg Post-Only Order at the 
locking price. Nasdaq also proposes to amend Rule 4702(b)(5)(A) to 
reflect this new functionality. Currently, if a Midpoint Peg Post-Only 
Order that posts to the Nasdaq Book is locking a preexisting Order, the 
Midpoint Peg Post-Only Order will execute against an incoming Order 
only if the price of the incoming sell (buy) Order is lower (higher) 
than the price of the preexisting Order. As an example, if the midpoint 
is at $11.03 and there is a Non-Displayed Order (or another Order with 
a Non-Display Order Attribute) on the Nasdaq Book to sell at $11.03, 
and if the incoming buy Midpoint Peg Post-Only Order locks the 
preexisting Non-Displayed Order at $11.03, the Midpoint Peg Post-Only 
Order could execute only against an incoming Order to sell priced at 
less than $11.03.
    However, under the proposed functionality, if there is a resting 
sell (buy) Order on the Nasdaq Book without the Midpoint Trade Now 
Attribute that is locked at its non-displayed price by a buy (sell) 
Midpoint Peg Post-Only Order, new incoming Orders (with or without the 
Midpoint Trade Now Order Attribute), entered at a price equal to or 
lower (higher) than the non-displayed price of the locked sell (buy) 
Order, will be able to execute against the Midpoint Peg Post-Only Order 
at the locking price. The resting Order will remain on the Nasdaq Book 
and will retain its priority after the subsequent Order has executed 
against the Midpoint Peg Post-Only Order. For example, the Best Bid is 
$11 and the Best Offer is $11.06, and a buy Midpoint Peg Post-Only 
Order is locking a preexisting sell Non-Displayed Order without the 
Midpoint Trade Now Attribute at $11.03. The Midpoint Peg Post-Only 
Order could execute against incoming Orders, with or without the 
Midpoint Trade Now Attribute, to sell priced equal to or less than 
$11.03.
    The proposed functionality relating to Midpoint Peg Post-Only 
Orders that lock a pre-existing Order, is set forth in Rule 4703(n). 
This new text makes the current functionality described in Rule 
4702(b)(5)(A) obsolete with respect to non-display orders. Accordingly, 
Nasdaq is revising language in Rule 4702(b)(5)(A) that once applied to 
both displayed and non-displayed orders to now only apply to displayed 
orders.\11\
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    \11\ As part of this proposal, Nasdaq also proposes to include 
references in Rule 4702(b)(5)(A) ``to buy,'' where appropriate, to 
further clarify this rule language.
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Implementation
    The Exchange will implement Midpoint Trade Now in the first quarter 
of 2019, and will announce the implementation date via an Equity Trader 
Alert. The Exchange will implement the proposed clarifying change to 
Rule 4702(b)(5)(A) at the earliest permissible time.\12\
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    \12\ Id.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\14\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The proposed Midpoint Trade Now functionality will allow market 
participants to have their Orders executed as a taker of liquidity 
should that Order become locked at its non-displayed price by a contra-
side Midpoint Peg Post-Only Order. This functionality will therefore 
promote an efficient and orderly market by allowing Orders in this 
scenario to execute and resolve a locked market. Similarly, allowing a 
subsequent Order to execute against a locking Midpoint Peg Post-Only 
Order if the Order that is locked by the Midpoint Peg Post-Only Order 
has not enabled the Midpoint Trade-Now functionality will also promote 
an efficient and orderly market by allowing the incoming Order in that 
scenario to execute and resolve an instance where Orders with a non-
displayed price on both the buy and sell side of the market are priced 
equally but not executing against each other. The Midpoint Trade Now 
functionality is an optional feature that is being offered at no 
additional charge, and is designed to reflect both the objectives of 
the Nasdaq market, and the order flow management practices of various 
market participants.
    The Exchange believes that the decision to offer the new 
functionality on an order-by-order basis only for one Order Type--and 
as a port setting for others--is consistent with the Act because it 
reflects the varying use cases of Nasdaq's Order Types and the 
flexibility required by different market participants. Users of the 
Non-Displayed Order Type may be more or less sensitive to removing 
liquidity depending on market conditions and thus would prefer to 
decide on a case-by-case basis whether that order will trade with any 
available liquidity on the book. In contrast, Price to Comply Orders, 
Post Only Orders, and Midpoint Peg-Post Only Orders are generally 
entered with the expectation of joining a certain price level, 
executing only as an adder of liquidity.\15\ Therefore, Nasdaq does not 
believe users of these Order Types would want or need flexibility on an 
order-by-order basis as it is generally inconsistent with the purpose 
of the Order Type. Nevertheless, Nasdaq recognizes that some market 
participants may prefer to execute whenever possible and thus

[[Page 60516]]

will make Midpoint Trade Now available for these Order Types as a port 
setting to provide blanket coverage.
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    \15\ Price to Comply Orders and Post Only Orders are generally 
Orders with a Display Attribute, but may in certain circumstances 
also have a non-displayed price. For example, if the NBBO is 10.99 x 
11.00, a Price to Comply Order to buy at 11.00 would be ranked at 
11.00 but displayed at 10.99. If the National Best Offer 
subsequently moved to 11.01, and the Participant did not elect to 
have their order canceled back or otherwise adjusted in such 
circumstances, the Order would then be ranked at the new midpoint. 
In this case, an incoming Midpoint Peg-Post Only Order could lock 
the resting Price to Comply Order at its non-displayed price.
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    Nasdaq believes that the proposed clarifying changes and revised 
rule text under Rule 4702(b)(5)(A) are consistent with the Act because 
they will help avoid investor confusion that may be caused by not 
making it clear that a Midpoint Peg Post-Only Order in the Rule's 
example is an Order to buy, and by having text that refers to 
functionality that will no longer apply. As noted above, Nasdaq is 
revising language in Rule 4702(b)(5)(A) that once applied to both 
displayed and non-displayed orders to now only apply to displayed 
orders.

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. This is an optional 
functionality that is being offered at no charge, and which may be used 
equally by similarly-situated participants. Moreover, the functionality 
may be replicated by other markets if deemed to be appropriate for 
their markets.
    As noted above, Nasdaq will offer the Midpoint Trade Now 
functionality through the OUCH, RASH, FLITE, and FIX protocols. Nasdaq 
will not offer the Midpoint Trade Now functionality through the QIX 
protocol.\16\ Nasdaq notes that, although the QIX protocol can support 
the removing of liquidity, QIX is designed to provide two-sided quote 
messages to the trading system, unlike the OUCH, RASH, FLITE and FIX 
protocols, which are designed to facilitate Order submission. Nasdaq 
also notes that QIX is an infrequently-used protocol,\17\ and that this 
protocol cannot support the expansion of fields that adopting the 
Midpoint Trade Now instruction would require. Nasdaq therefore believes 
that its decision to offer the Midpoint Trade Now instruction through 
the OUCH, RASH, FLITE, and FIX protocols will not impose any burden on 
competition that is not necessary or appropriate.
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    \16\ Although participants may use other protocols, such as 
DROP, those protocols are not related to Order entry, and so the 
Midpoint Trade Now functionality is not being offered for those 
protocols.
    \17\ As of September 12, 2018, of the 4,855 customer ports for 
the various Nasdaq protocols, only 134 of those ports are QIX 
protocol.
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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 \18\ and Rule 19b-
4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and 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. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is 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-NASDAQ-2018-090 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2018-090. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-090 and should be submitted 
on or before December 17, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25598 Filed 11-23-18; 8:45 am]
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