[Federal Register Volume 85, Number 48 (Wednesday, March 11, 2020)]
[Notices]
[Pages 14252-14256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04913]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88322; File No. SR-BX-2020-003]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Correct and
Clarify Rules 4702(b)(3)(B) and 4703(d)
March 5, 2020.
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 February 26, 2020, Nasdaq BX, Inc. (``BX'' 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 a proposal to correct and clarify Rules
4702(b)(3)(B) and 4703(d).
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqbx.cchwallstreet.com/, at the principal office
of the Exchange, and at the Commission's Public Reference Room.
[[Page 14253]]
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 Rules 4702 and 4703 to correct and
clarify its various descriptions of the circumstances in which the
Exchange will cancel certain types of midpoint pegged Orders \3\ after
they post to the Exchange Book \4\ and the National Best Bid and
National Best Offer (``NBBO'') or the Inside Bid and Inside Offer
subsequently shifts.\5\ The Exchange intended for these descriptions to
be consistent and comprehensive, but upon review, they are somewhat
discordant and confusing.
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\3\ Pursuant to Rule 4701(e), the term ``Order'' means an
instruction to trade a specified number of shares in a specified
System Security submitted to the System 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 Exchange Book when submitted to the
System. 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 Exchange Book when submitted to the System.
\4\ Pursuant to Rule 4701(a)(1), the ``Exchange Book'' refers to
a montage for Quotes and Orders that collects and ranks all Quotes
and Orders submitted by Participants. The term ``Quote'' means a
single bid or offer quotation submitted to the System by a Market
Maker or Equities ECN and designated for display (price and size)
next to the Participant's MPID in the Exchange Book. See Rule
4701(d).
\5\ Pursuant to Rule 4703(d), the terms ``Inside Bid'' and
``Inside Offer'' mean the price to which an Order is pegged for
purposes of Rule 4703. The term ``Midpoint'' means the midpoint of
the NBBO or the Inside Bid and Inside Offer.
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In 2015, the Exchange restated its Rules that describe its Order
Types (Rule 4702) and Attributes (Rule 4703).\6\ Among the topics that
the restated Rules described were the circumstances in which the
Exchange cancels orders priced at the Midpoint of the NBBO (the Inside
Bid and the Inside Offer) or priced at their limit price when the NBBO
(the Inside Bid and the Inside Offer) changes after the order posts to
the Exchange Book. The Exchange described these circumstances in two
different provisions of its Rules pertaining to Orders with Midpoint
pegging (``Midpoint-Pegged Orders'').
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\6\ See Securities Exchange Act Release No. 34-75291 (June 24,
2015), 80 FR 37698 (July 1, 2015) (SR-BX-2015-015).
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First, in Rule 4702(b)(3)(B), the Exchange states as follows in
describing the cancellation of a Non-Displayed Order with a Midpoint
Pegging Order Attribute assigned to it:
If a Non-Displayed Order entered through OUCH or FLITE is assigned
a Midpoint Pegging Order Attribute, and if, after being posted to the
Exchange Book, the NBBO changes so that the Non-Displayed Order is no
longer at the Midpoint between the NBBO, the Non-Displayed Order will
be cancelled back to the Participant. In addition, if a Non-Displayed
Order entered through OUCH or FLITE is assigned a Midpoint Pegging
Attribute and also has a limit price that is lower than the midpoint
between the NBBO for an Order to buy (higher than the midpoint between
the NBBO for an Order to sell), the Order will nevertheless be accepted
at its limit price and will be cancelled if the midpoint between the
NBBO moves lower than (higher than) the price of an Order to buy
(sell).
Second, in describing the Midpoint Pegging Attribute, Rule 4703(d)
explains when the Exchange will cancel an Order with this Attribute
enabled:
An Order entered through OUCH or FLITE with Midpoint Pegging will
have its price set upon initial entry to the Midpoint, unless the Order
has a limit price that is lower than the Midpoint for an Order to buy
(higher than the Midpoint for an Order to sell), in which case the
Order will be ranked on the Exchange Book at its limit price.
Thereafter, if the NBBO changes so that: the Midpoint is lower than
(higher than) the price of an Order to buy (sell), the Pegged Order
will be cancelled back to the Participant.
The Exchange intended for these two Rules to be substantively
identical. That is, the Rules should have provided for the Exchange to
cancel Midpoint-Pegged Orders in the same circumstances when entered
through OUCH or FLITE. Upon review, however, the Exchange has
determined that the Rules provide somewhat opaque descriptions of the
circumstances in which a change in the NBBO/Inside Bid and Inside Offer
will and will not result in the cancellation of a Midpoint-Pegged
Order. Each Rule states that the Exchange will cancel an Order to buy
(sell) if, after entry, the NBBO/Inside Bid and Inside Offer shifts so
that the Midpoint is lower (higher) than the price of the buy (sell)
Order. However, these descriptions in the Rules do not clearly
distinguish between Midpoint-Pegged Orders that post to the Exchange
Book at the Midpoint of the NBBO/Inside Bid and Inside Offer (i.e.,
orders with limit prices more aggressive than the Midpoint) from those
Orders that post to the Book at their limit prices (i.e., orders with
limit prices at or less aggressive than the Midpoint). In the former
case, any post-entry shift in the Midpoint of the NBBO/Inside Bid and
Inside Offer will result in cancellation of the Order. In the latter
case, however, a post-entry shift in the Midpoint of the NBBO/Inside
Bid and Inside Offer will result in cancellation only if the Midpoint
shifts lower than (higher than) the limit price of an Order to buy
(sell). If the Midpoint is higher than (lower than) the limit price of
an Order to buy (sell) upon Order entry, and it remains so after
shifting, then the Order will remain on the Book at its limit price.
The Exchange believes that this result is implicit in the notion that
these Order Types may post to the Exchange Book at their limit prices
when the Midpoints are higher (lower) than the limit prices of Orders
to buy (sell). Nevertheless, the Rules do not describe this scenario
expressly.
Similarly, the Rules do not distinguish the particular
circumstances in which a crossed Inside Bid and Inside Offer will and
will not result in a cancellation of an Order. The Midpoint Pegging
Attribute rule simply states that the Exchange will cancel Orders when
the Inside Bid and Inside Offer becomes crossed after these Orders are
posted to the Exchange Book. However, the Exchange will only cancel a
Midpoint-Pegged Order that is ranked at its limit price where the
Inside Bid and Inside Offer become crossed, such that the Midpoint of
the crossed quotation remains equal to or higher (lower) than the limit
price of the Order to buy (sell), and a new sell (buy) Order is
received at a price that locks or crosses the limit price of the
resting Midpoint-Pegged Order. If an Order to buy (sell) posts to the
Exchange Book at its limit price, and the Inside Bid and Inside Offer
subsequently become crossed but the Midpoint remains equal to or higher
than (lower than) the limit price of the Order (and there are no
contra-side orders that lock or cross the Order), then the Exchange
will not cancel the Order. Likewise, if a Midpoint-Pegged Order is
ranked at the
[[Page 14254]]
Midpoint of the Inside Bid and Inside Offer and the Inside Bid and
Inside Offer becomes crossed but the Midpoint does not change, then the
Exchange will not cancel the order unless a new Order is received at a
price that locks or crosses the Midpoint of the Inside Bid and Inside
Offer.
To address the foregoing issues and to increase clarity, the
Exchange proposes to amend and restate Rules 4702(b)(3)(B) and 4703(d),
as follows.
First, the Exchange proposes to delete entirely the language of
Rule 4702(b)(3)(B) excerpted above. This language, which again
describes the behavior of a Non-Displayed Order with a Midpoint Pegging
Attribute enabled, is duplicative of the general description of the
behavior of a Midpoint Pegging Attribute in Rule 4703(d). The Exchange
believes that the concept described in these two Rules is best stated
only once to avoid unintended discrepancies. In this instance, the
Exchange believes that the language is most appropriate for inclusion
in Rule 4703(d).
Second, the Exchange proposes to restate the relevant language of
Rule 4703(d) as follows:
An Order entered through OUCH or FLITE with Midpoint Pegging will
have its price set upon initial entry to the Midpoint, unless the Order
has a limit price, and that limit price is lower than the Midpoint for
an Order to buy (higher than the Midpoint for an Order to sell), in
which case the Order will be ranked on the Exchange Book at its limit
price. The price of the Order will not thereafter be adjusted based on
changes to the Inside Bid or Offer. However, an Order with Midpoint
Pegging entered through OUCH or FLITE will be cancelled back to the
Participant after initial entry and posting to the Exchange Book if any
of the following conditions are met:
There is no Inside Bid and/or Inside Offer;
The Order to buy (sell) is entered with a limit price
above (below) the Midpoint and is ranked at the Midpoint; thereafter
the Inside Bid and/or Inside Offer change so that the Midpoint changes
and the Order is no longer at the Midpoint;
The Order to buy (sell) is entered at a limit price that
is equal to or less than (greater than) the Midpoint and is ranked at
its limit price; thereafter, the Inside Bid and/or Inside Offer change
so that the Midpoint is lower (higher) than the limit price of the
Order;
The Order to buy (sell) is entered at a limit price that
is equal to or less than (greater than) the Midpoint and is ranked at
its limit price; thereafter, the Inside Bid and Inside Offer become
crossed, such that the Midpoint of the crossed Quotation remains equal
to or higher (lower) than the limit price of the Order, and then a new
sell (buy) Order is received at a price that locks or crosses the limit
price of the resting Order marked for Midpoint Pegging; or
The Order to buy (sell) is entered at a limit price that
is greater than (less than) the Midpoint and is therefore ranked at the
Midpoint; thereafter, the Inside Bid and Inside Offer become crossed
but the Midpoint does not change, and then a new sell (buy) Order is
received at a price that locks or crosses the Midpoint of the Inside
Bid and Inside Offer.
The Exchange believes that the restated language is more precise
than the existing language because it specifies that the Exchange will
cancel an Order with Midpoint Pegging that posts to the Exchange Book
at its limit price, when the Inside Bid and Inside Offer later shift,
only when the Inside Bid and Inside Offer shift so that the Midpoint of
the Inside Bid and Inside Offer becomes lower (higher) than the limit
price of an Order to buy (sell). Again, where the Inside Bid and Inside
Offer shift after the Order posts such that the Midpoint of the Inside
Bid and Inside Offer remains or becomes higher (lower) than the limit
price of an Order to buy (sell), cancellation of the Order is
unnecessary because the Order can simply remain on the Exchange Book at
its limit price. The restated language is also more precise because it
specifies that for an Order with Midpoint Pegging with a limit price
that is more aggressive than the Midpoint of the Inside Bid and Inside
Offer, any change to the Midpoint will result in cancellation of the
Order.
Likewise, the restated language is more precise than the existing
language in that the restated language specifies that the Exchange will
cancel an Order with Midpoint Pegging to buy (sell) that posts at its
limit price, when the Inside Bid and Inside Offer subsequently become
crossed and the Midpoint of the crossed Inside Bid and Inside Offer
remains equal to or higher (lower) than the limit price of the Order to
buy (sell), only when a new sell (buy) Order is received at a price
that locks or crosses the limit price of the resting Order. The
restated language also specifies that the Exchange will cancel an Order
with Midpoint Pegging to buy (sell) that posts at the Midpoint of the
Inside Bid and Inside Offer, when the Inside Bid and Inside Offer
subsequently become crossed and the Midpoint of the crossed Inside Bid
and Inside Offer remains the same, only when the Exchange receives a
new sell (buy) Order at a price that locks or crosses the Midpoint of
the Inside Bid and Inside Offer. Other than in these two circumstances,
cancellation of an Order simply because the Inside Bid and Inside Offer
cross is unnecessary because the Order need not be re-priced. When an
Order to buy (sell) is ranked at its limit price, and the Inside Bid
and Inside Offer become crossed while the Midpoint remains at or above
(below) the limit price, the crossed market does not impact the Order,
which can still rest on the Exchange Book at its limit price because
the Inside Bid and Inside Offer could uncross prior to the Order
executing. Likewise, when an Order to buy (sell) is ranked at the
Midpoint of the Inside Bid and Inside Offer, and the Inside Bid and
Inside Offer become crossed but the Midpoint does not change, the
crossed market also does not impact the Order, which can continue to
rest on the Exchange Book at the Midpoint because the Inside Bid and
Inside Offer could uncross (with the Midpoint still remaining
unchanged) prior to the Order executing.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\7\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\8\ 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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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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The proposal will protect investors by amending Rules 4702 and 4703
so that they will describe more clearly what the Rules currently imply
with respect to the circumstances in which the Exchange will not cancel
Midpoint-Pegged Orders. That is, the Exchange believes that concept of
a limit price fairly implies that the Exchange has no need to and thus,
it does not presently, cancel a Midpoint-Pegged Order to buy (sell)
when such an Order is posted at its limit price and the Inside Bid and
Inside Offer shifts thereafter but the Midpoint remains above (below)
the limit price; however, Rule 4702(a)(3)(B) merely states that any
post-entry shift in the Midpoint will result in the cancellation of a
Midpoint-Pegged Order. To avoid confusion, the proposal clarifies that
the Exchange will cancel a Midpoint-Pegged Order posted at its limit
price if the Inside Bid and Inside Offer shifts after entry such that
the Midpoint becomes lower (higher) than the limit price. In this
circumstance,
[[Page 14255]]
cancellation is warranted because the Order would need to be re-priced,
and a Midpoint-Pegged Order entered using OUCH or FLITE cannot be re-
priced. Similarly, if a Midpoint-Pegged Order posts to the Exchange
Book at the Midpoint of the Inside Bid and Inside Offer and then the
Midpoint shifts in either direction, the Order will be cancelled
because it would need to be re-priced, and again, OUCH or FLITE do not
allow for re-pricing to occur.
Similarly, the Exchange believes that it is helpful to investors to
clarify the circumstances in which the Exchange does and does not
cancel Midpoint-Pegged Orders in a crossed market. Rule 4703(d) states
generally that the Exchange will cancel Midpoint-Pegged Orders if the
Inside Bid and Inside Offer become crossed. However, as discussed
above, the Exchange does not need to, and thus it does not presently,
cancel Midpoint-Pegged Orders in all such instances. Although
cancellation is warranted to prevent Orders from actually executing in
a crossed market,\9\ the Exchange does not believe that cancellation is
warranted simply because the markets cross if there remains a
possibility that the markets will uncross prior to an execution
occurring. Thus, the Exchange proposes that it will not cancel a
Midpoint-Pegged Order to buy (sell) when the Order is ranked at its
limit price and the Inside Bid and Inside Offer become crossed
thereafter (and the Midpoint remains equal to or more aggressive than
its limit price), but no new sell (buy) Order is received that locks or
crosses the limit price of the resting Midpoint-Pegged Order. Unless or
until the Exchange receives a new Order that locks or crosses the limit
price of the resting Midpoint-Pegged Order while the market remains
crossed, cancellation is unnecessary because the Midpoint-Pegged Order
can continue to rest at its limit price and the market may uncross
before the Midpoint-Pegged Order executes. Likewise, as was also
discussed above, the Exchange proposes that it will not cancel a
Midpoint-Pegged Order that is ranked at the Midpoint of the Inside Bid
and Inside Offer where the market becomes crossed, provided that while
the market is crossed, the Midpoint of the crossed Inside Bid and
Inside Offer does not change, and the Exchange does not receive a new
Order that would lock or cross the Midpoint. Again, cancellation is
unnecessary in this scenario because the Midpoint-Pegged Order can
continue to rest at the Midpoint while the market is crossed and
because the market may uncross (with the Midpoint remaining unchanged)
prior to execution of the Order.\10\
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\9\ See Securities Exchange Act Release No. 34-79290 (Nov. 10,
2016), 81 FR 81184, 81186 (Nov. 17, 2016) (stating that the
``midpoint of a crossed market is not a clear and accurate
indication of a valid price'' and that cancellation in a crossed
market ``would avoid mispriced executions'').
\10\ If at any point after the Midpoint-Pegged Order posts to
the Exchange Book at the Midpoint, the Inside Bid and Inside Offer
changes so that the price of the Order is no longer at the Midpoint,
then the order must be cancelled because orders entered through OUCH
or FLITE cannot be re-priced.
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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 Exchange intends for the
proposal to improve the precision with which the Rules describe the
circumstances in which it will cancel Midpoint-Pegged Orders after
entry, as described above. The Exchange does not expect that these
changes will have any impact whatsoever on competition.
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 \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 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-BX-2020-003 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-BX-2020-003. 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
[[Page 14256]]
Number SR-BX-2020-003, and should be submitted on or before April 1,
2020.
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\13\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04913 Filed 3-10-20; 8:45 am]
BILLING CODE 8011-01-P