[Federal Register Volume 84, Number 209 (Tuesday, October 29, 2019)]
[Notices]
[Pages 57929-57932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23548]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87391; File No. SR-NASDAQ-2019-057]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Amend Rule 4121
October 23, 2019.
I. Introduction
On July 16, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') 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 amend Nasdaq Rule 4121 (Trading Halts Due to
Extraordinary Market Volatility) to enhance the re-opening auction
process for Nasdaq-listed securities following trading halts due to
extraordinary market volatility. The proposed rule change was published
for comment in the Federal Register on July 25, 2019.\3\ On September
5, 2019, the Commission extended the time period within which to either
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change, to October 23, 2019.\4\ The Commission
received no comment letters on the proposed rule change. This order
institutes proceedings under Section 19(b)(2)(B) of the Act to
determine whether to approve or disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86412 (July 19,
2019), 84 FR 35900 (``Notice'').
\4\ See Securities Exchange Act Release No. 86875 (September 11,
2019), 84 FR 47998.
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II. Background and Description of the Proposal
The Exchange has proposed to amend the re-opening auction process
for Nasdaq-listed securities following trading halts due to
extraordinary market volatility (``market-wide circuit breakers'').\5\
Currently, after a Level 1 or Level 2 market-wide circuit breaker
trading halt initiated under Nasdaq Rule 4121 (``MWCB Halt''), trading
in Nasdaq-listed securities would resume on the Exchange through a Halt
Cross.\6\ Additionally, the Exchange would extend the Display Only
Period for an additional 1-minute period if there is volatility during
the Display Only Period (i.e., an order imbalance in the security). The
volatility checks are governed under Nasdaq Rule 4120(c)(7)(C)(1) and
(2), and provide that the Display Only Period will be extended if: (i)
The expected cross price moves the greater of 5% or 50 cents, or (ii)
all market orders will not be executed in the cross.
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\5\ The Exchange also proposes a number of formatting clean-ups
in Nasdaq Rule 4121. See Notice, supra note 3, at 35903.
\6\ In particular, Nasdaq Rule 4121(c)(i) provides that the re-
opening of trading following a Level 1 or Level 2 trading halt shall
follow the procedures set forth in Nasdaq Rule 4120. The Exchange
states that these procedures are set forth in Nasdaq Rule 4120(c)(7)
(see Notice, supra note 3, at 35901), which provides, in relevant
part, for a 5-minute Display Only Period during which market
participants may enter quotes and orders in Nasdaq systems, at the
conclusion of which trading will immediately resume through the Halt
Cross under Nasdaq Rule 4753.
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The Exchange proposes modifications to its rules that would allow
it to instead follow a process it believes is similar to that described
in Nasdaq Rule 4120(c)(10) for releasing a security
[[Page 57930]]
following a Trading Pause initiated pursuant to the Plan to Address
Extraordinary Market Volatility (``LULD'' or ``LULD Plan'').\7\
Proposed paragraph (d) to Nasdaq Rule 4121 provides that an MWCB Halt
shall be terminated when Nasdaq releases the security for trading. For
any such security listed on Nasdaq, prior to terminating the MWCB Halt,
there will be a 15-minute ``Initial Display Only Period'' during which
market participants may enter quotations and orders in that security in
Nasdaq systems. The Initial Display Only Period will be 15 minutes in
duration to coincide with the entire duration of an MWCB Halt.
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\7\ The Exchange believes that its LULD re-opening process has
been effective in facilitating a fair and orderly market following
Trading Pauses initiated pursuant to the LULD Plan, and believes it
is implementing similar functionality for trading halts in Nasdaq-
listed securities following the initiation of market-wide circuit
breakers. The Exchange further believes that the proposed changes
would promote price formation and provide a more consistent re-
opening process for members and investors following such trading
halts, similar to the current implementations for re-opening
following an MWCB Halt on NYSE Arca, Inc. (``Arca'') and Cboe BZX
Exchange, Inc. (``BZX''). See Notice, supra note 3, at 35900-01.
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Proposed Nasdaq Rule 4121(d)(1)(A) provides that during the Initial
Display Only Period, the Exchange will also establish the ``Auction
Reference Price,'' which is the Nasdaq last sale price (either round or
odd lot) after 9:15 a.m. Eastern Time but prior to the MWCB Halt and,
if none, the prior trading day's Nasdaq Official Closing Price.\8\
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\8\ The Exchange believes its proposal is similar to the current
implementations on Arca and BZX for re-openings following an MWCB
Halt. See Arca Rule 7.35-E(a)(8)(A) and BZX Rule 11.23(a)(9). The
Exchange states that the proposed Auction Reference Price for MWCB
Halts is substantially similar to Arca's and BZX's auction reference
prices, except the Exchange will use the last Nasdaq sale price
prior to the MWCB Halt, as opposed to the last consolidated price.
The Exchange believes that it is appropriate to use the price of a
trade on the primary listing market to set the reference price for
auctions in Nasdaq-listed securities when such a trade has been
executed recently. See Notice, supra note 3, at 35902.
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Proposed Nasdaq Rule 4121(d)(1)(B) describes how the Exchange would
calculate the upper and lower MWCB Auction Collar prices during the
Initial Display Period. The lower MWCB Auction Collar is derived by
subtracting from the Auction Reference Price 10% of the Auction
Reference Price, or in the case of securities with an Auction Reference
Price of $5 or less, $0.50. The upper MWCB Auction Collar is derived by
adding to the Auction Reference Price 10% of the Auction Reference
Price, rounded to the nearest minimum price increment, or in the case
of securities with an Auction Reference Price of $5 or less, $0.50.\9\
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\9\ The Exchange notes that both Arca and BZX employ narrower
auction collar thresholds (5% of the auction reference price, or
$0.15 for securities with an auction reference price of $3 or less).
See Arca Rule 7.35-E(e)(7)(B)(ii) and BZX Rule 11.23(d)(2)(C)(i)(B).
The Exchange believes that the wider parameters proposed for MWCB
Auction Collars are set at appropriate levels that would allow the
Exchange to re-open trading in securities more quickly while still
reducing the potential to re-open at a price that is significantly
away from the last traded price of the security. The Exchange also
notes that it has traditionally been a listing venue for equity
stocks, while Arca and BZX have traditionally listed more ETFs,
which track entire sectors, indices or other groups of assets and
can mute the effect of price volatility of the ETF. The Exchange
believes that the proposed wider price bands strikes an appropriate
balance between allowing the Exchange to return to normal continuous
trading in a measured, timely manner while accommodating the
potential higher volatility of individual stocks. See Notice, supra
note 3, at 35902.
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Proposed Nasdaq Rules 4121(d)(2) and (d)(3) specify the
circumstances when the Exchange would extend the Display Only Period
for an MWCB Halt re-opening process, and how the Exchange would adjust
the MWCB Auction Collars for each extension. In particular, at the
conclusion of the Initial Display Only Period, the security will be
released for trading unless, at the end of the Initial Display Only
Period, Nasdaq detects an order imbalance in the security. In that
case, Nasdaq will extend the Display Only Period for an additional 5-
minute period (``Extended Display Only Period''), and the MWCB Auction
Collar prices will be adjusted as follows:
If the Display Only Period is extended because the
calculated price at which the security would be released for trading is
below the lower MWCB Auction Collar price or all sell market orders
would not be executed in the cross, then the new lower MWCB Auction
Collar price is derived by subtracting 10% of the Auction Reference
Price, which was rounded to the nearest minimum price increment, or in
the case of securities with an Auction Reference Price of $5 or less,
$0.50, from the previous lower MWCB Auction Collar price, and the upper
MWCB Auction Collar price will not be changed.
If the Display Only Period is extended because the
calculated price at which the security would be released for trading is
above the upper MWCB Auction Collar price or all buy market orders
would not be executed in the cross, then the new upper MWCB Auction
Collar price is derived by adding 10% of the Auction Reference Price,
which was rounded to the nearest minimum price increment, or in the
case of securities with an Auction Reference Price of $5 or less,
$0.50, to the previous upper MWCB Auction Collar price, and the lower
MWCB Auction Collar price will not be changed.
At the conclusion of the Extended Display Only Period, the security
will be released for trading unless, at the end of the Extended Display
Only Period, Nasdaq detects an order imbalance in the security. In that
case, Nasdaq will further extend the Display Only Period, continuing to
adjust the MWCB Auction Collar prices every five minutes in the manner
described in proposed Nasdaq Rule 4121(d)(2) until the security is
released for trading; provided, however, that Nasdaq will not adjust
the MWCB Auction Collar prices past 50% of the Auction Reference Price
for any security during any Extended Display Only Period.\10\ During
any additional Extended Display Only Period after the first Extended
Display Only Period, Nasdaq shall release the security for trading at
the first point there is no order imbalance.
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\10\ The Exchange notes that the proposal to limit the MWCB
Auction Collars to 50% of the Auction Reference Price deviates from
the implementations of MWCB auction collars on Arca and BZX, neither
of which limit the auction collars. The Exchange states that it
balanced the potential for the proposed 50% limit to prevent the
transition to continuous trading, particularly in instances of
extreme price volatility that could result in increased Extended
Display Only Periods against the potential for extreme volatility
resulting in trades at prices far away from a security's fundamental
value, which could ultimately harm parties to the trade. The
Exchange believes that an MWCB Halt will be triggered during a
period of significant volatility across markets that may not
correlate to the fundamental value of a single security and that
limiting the MWCB Auction Collars to 50% of the Auction Reference
Price achieves an appropriate balance in favor of preventing
extraordinary volatility that could result in significant price
disparity in post-auction trading. See Notice, supra note 3, at
35903.
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Proposed Nasdaq Rule 4121(d)(4) specifies that an order imbalance
would be established for purposes of the process under Nasdaq Rule 4121
as follows:
The calculated price at which the security would be
released for trading is above (below) the upper (lower) MWCB Auction
Collar price calculated under paragraphs (1), (2), or (3) of Nasdaq
Rule 4121(d); or
all market orders would not be executed in the cross.
Proposed Nasdaq Rule 4121(d)(5) describes how the MWCB Auction
Collars will function in the event of more than one trading halt
initiated under Nasdaq Rule 4121 in the same day. In the event of a
Level 2 Market Decline while a security is in a Level 1 MWCB Halt and
has not been released
[[Page 57931]]
for trading, Nasdaq will recalculate the lower and upper MWCB Auction
Collar prices in the particular security in accordance with paragraph
(B)(1) of proposed Nasdaq Rule 4121.\11\ In this instance, the Exchange
will start the calculation of the new upper and lower MWCB Auction
Collar prices using 10% of the Auction Reference Price, rounded to the
nearest minimum price increment, or $0.50 for securities with an
Auction Reference Price of $5 or less. The Exchange believes that the
proposed language would bring greater transparency to market
participants in how the Exchange would handle the calculation of MWCB
Auction Collars.
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\11\ As currently provided in Nasdaq Rule 4121(b)(i), the
Exchange would halt trading based on a Level 1 or Level 2 Market
Decline only once per day.
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The Exchange also proposes to add new paragraph (e) to Nasdaq Rule
4121 to describe how the Exchange will handle the publication of MWCB
Halt Information. Specifically, at the beginning of the Initial Display
Only Period and continuing through the resumption of trading, Nasdaq
will disseminate by electronic means an Order Imbalance Indicator \12\
every second. The Exchange also proposes to make a related change by
adding new Nasdaq Rule 4753(a)(3)(G), which will provide that for
purposes of an MWCB Halt initiated pursuant to Nasdaq Rule 4121, the
Order Imbalance Indicator will include Auction Reference Prices and
MWCB Auction Collars, as defined in Nasdaq Rule 4121(d).
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\12\ As described in Nasdaq Rule 4753(a)(3), an ``Order
Imbalance Indicator'' is a message disseminated by electronic means
containing information about Eligible Interest and the price at
which such interest would execute at the time of dissemination.
``Eligible Interest'' is defined as any quotation or any order that
has been entered into the system and designated with a time-in-force
that would allow the order to be in force at the time of the Halt
Cross. See Nasdaq Rule 4753(a)(5).
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III. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2019-057
and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the proposal should be
approved or disapproved.\13\ Institution of such proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. Institution of
disapproval proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
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\13\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis and input concerning the proposed rule change's consistency
with the Act \14\ and, in particular, with Section 6(b)(5) of the Act,
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 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.\15\
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\14\ 15 U.S.C. 78f(b)(5).
\15\ Id.
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For the reasons discussed above, the Commission believes it is
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of
the Act to determine whether the proposal should be approved or
disapproved.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is inconsistent with Section 6(b)(5) or any other provision of the Act,
or the rules and regulation thereunder. Although there do not appear to
be any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\16\
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\16\ Section 19(b) (2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by November 19, 2019. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
December 3, 2019. The Commission asks that commenters address the
sufficiency of the Exchange's statements in support of the proposal
which are set forth in the Notice,\17\ in addition to any other
comments they may wish to submit about the proposed rule change. In
particular, the Commission seeks comment, including where relevant, any
specific data, statistics, or studies, on the following:
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\17\ See Notice, supra note 3.
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1. The Nasdaq proposal appears to differ from other primary listing
market MWCB re-opening processes in three ways. First, the Nasdaq
proposal would establish a security's auction reference price after a
MWCB Halt by referring to the Nasdaq last sale price (as opposed to the
consolidated last sale price). Second, the Nasdaq proposal would
establish wider price bands of 10% of the Auction Reference Price, or
in the case of securities with an Auction Reference Price of $5 or
less, $0.50 (as opposed to 5% of the auction reference price, or $0.15
for securities with an auction reference price of $3), and would widen
the price bands in those larger increments (as opposed to widening in
the smaller increments). Third, the Nasdaq proposal would not widen the
price bands for an individual security beyond 50% (as opposed gradually
widening price bands without limit until a security is reopened).
Should the primary listing exchanges harmonize their respective
processes for reopening trading after a halt pursuant to the market-
wide circuit breaker mechanism following a Level 1 or Level 2 Market
Decline, and if so, why? If so which aspects of the re-opening
processes should be harmonized (e.g., period of auction order entry,
type of auction information disseminated, length of dissemination
period, frequency of dissemination, auction reference price,
determination of auction match price, width of auction collars, reasons
for extending auction, length of auction extension period, thresholds
for expanding auction collars, or limits on expansion of auction
collars) and what are the appropriate parameters? Should Nasdaq further
harmonize its proposed MWCB reopening process to align with Arca and
BZX on establishment of auction reference prices, auction collars
levels, and/or the limit (or lack thereof) on auction collar
adjustments?
2. Is it appropriate for the Exchange to derive and expand the
lower/upper MWCB Auction Collar by subtracting from/adding to the
Auction Reference Price 10% of the Auction Reference Price (or $0.50
for securities priced $5 or less), which are currently wider than
[[Page 57932]]
the parameters that Arca and BZX use to derive and expand their
respective MWCB auction collars? Are there any specific data,
statistics, or studies to support the Exchange's belief that (1) the
wider parameters proposed for MWCB Auction Collars are set at
appropriate levels that would allow the Exchange to re-open trading in
securities more quickly while still reducing the potential to re-open
at a price that is significantly away from the last traded price of the
security and (2) the wider parameters are appropriate because the
Exchange has traditionally been a listing venue for equity stocks as
contrasted with Arca and BZX which have traditionally listed more ETFs,
which can mute the effect of price volatility? \18\
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\18\ See Notice, supra note 3, at 35902.
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3. Is it appropriate for the Exchange to not adjust the MWCB
Auction Collar prices past 50% of the Auction Reference Price for any
security during any Extended Display Only Period? Are there any
specific data, statistics, or studies to support the Exchange's belief
that (1) without this limitation, there is potential for extreme
volatility resulting in trades at prices far away from a security's
fundamental value, ultimately harming investors that are party to the
trade and (2) it may be more appropriate to continue adjusting price
collars in the context of LULD where trading is halted due to a period
of extraordinary volatility in a single security because there may be
instances of a discrete event that ultimately impacts the value of the
individual security and that an MWCB Halt will be triggered during a
period of significant volatility across markets that may not correlate
to the fundamental value of a single security? \19\
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\19\ See id. at 35903.
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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-2019-057 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-2019-057. 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-2019-057 and
should be submitted on or before November 19, 2019. Rebuttal comments
should be submitted by December 3, 2019.
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)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23548 Filed 10-28-19; 8:45 am]
BILLING CODE 8011-01-P