[Federal Register Volume 85, Number 71 (Monday, April 13, 2020)]
[Notices]
[Pages 20533-20542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07653]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88583; File No. SR-Phlx-2020-15]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Exchange
Rules 3301A and 3301B
April 7, 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 March 26, 2020, Nasdaq PHLX LLC (``Phlx'' 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 Exchange Rules 3301A and 3301B to
modify the behavior of Order Types and Order Attributes in certain
situations.
The Exchange intends to implement its proposed rule change on or
before the end of the Second Quarter of 2020. The Exchange will
announce the new implementation date by an Equity Trader Alert, which
shall be issued prior to the implementation date.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaqphlx.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.
[[Page 20534]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Pursuant to Rule 3307, the Exchange maintains discretion to execute
Orders in accordance with one of two execution algorithms: ``Price/
Time'' and ``Pro Rata.'' Prior to November 1, 2019, the Exchange
executed Orders in accordance with the Pro Rata Execution Algorithm,
which executes trading interest in the following order of priority: (1)
Price; (2) Displayed interest with a size of one round lot or more; (3)
Displayed odd-lot Orders; (4) Non-Displayed interest with a size of one
round lot or more; (5) Minimum Quantity Orders; and (6) Non-Displayed
odd-lot Orders.\3\ However, as of November 1, 2019,\4\ the Exchange
migrated to the Price/Time Execution Algorithm, which executes trading
interest in order of: (1) Price; (2) Displayed interest; and (3) Non-
Displayed interest.\5\
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\3\ See Rule 3307(b).
\4\ See Equity Trader Alert 2019-77 (Sept. 27, 2019), at http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2019-77.
\5\ See Rule 3307(a).
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In accordance with the Exchange's shift to the Price/Time Execution
Algorithm, the Exchange proposes to adopt functionality that was
unavailable for use under the Pro Rata Execution Algorithm, but which
is common among Price/Time exchanges, including the Exchange's
affiliates, the Nasdaq Stock Market, LLC (``Nasdaq'') and Nasdaq BX,
Inc. (``BX'').\6\
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\6\ All of the proposed functionalities will apply only to the
extent that the Exchange continues to operate on a Price/Time basis.
They would not be available if the Exchange was to revert to a Pro
Rata Execution Algorithm.
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The Exchange also proposes to make several non-substantive changes
to correct and conform the Exchange's Rules to corresponding rules of
Nasdaq and/or BX.\7\
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\7\ For example, at various points in the rule text of Rule
3301A, the Exchange proposes to add the word ``Displayed'' before
the word ``Order'' to conform that rule text to corresponding Nasdaq
and BX rule text (Nasdaq and BX Rule 4702). Also to conform to
corresponding Nasdaq and BX rule text, the Exchange proposes, in
Rule 3301A(b)(4)(C), to add, to the paragraph describing the
treatment of a Post-Only Order designated as an ISO that locks or
crosses an Order on the PSX Book, language stating that such an
Order would either execute at time of entry, ``post at its limit
price,'' or would have its price adjusted prior to posting.
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Post-Only Orders
The Exchange proposes to amend Rule 3301A to provide for additional
functionalities for Post-Only Orders.\8\
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\8\ A ``Post-Only Order'' is an Order Type designed to have its
price adjusted as needed to post to the PSX Book in compliance with
Rule 610(d) under Regulation NMS by avoiding the display of
quotations that lock or cross any Protected Quotation in a System
Security during Market Hours, or to execute against locking or
crossing quotations in circumstances where economically beneficial
to the Participant entering the Post-Only Order. See Rule
3301A(b)(4)(A).
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One set of changes would provide Participants with the option of
cancelling a Post-Only Order in circumstances where currently, the
Exchange would adjust the price of such an Order. The proposed
functionality will apply when: (1) An incoming Post-Only Order locks or
crosses a Protected Quotation; \9\ (2) an adjusted Post-Only Order
locks or crosses a Displayed Order at its displayed price on the
Exchange Book; or (3) a Post-Only Order would not lock or cross a
Protected Quotation but would lock or cross a Displayed Order at its
displayed price on the Exchange Book. This functionality will be
offered as a port setting and may be applied to all Orders entered
under the same MPID for Orders entered through RASH and FIX, or, in the
case of Participants using the OUCH or FLITE order entry protocols, it
may be applied to all Orders entered through a specific order entry
port and under the same MPID.\10\
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\9\ The term ``Protected Quotation'' has the meaning assigned to
it under Rule 600 of Regulation National Market System. See Rule
3301(j). Unless otherwise stated, it refers to a quotation of a
market center other than PSX. Id.
\10\ RASH and FIX are order entry protocols to enter orders into
RASH, and RASH is a system separate from the matching system.
Because of that, the granular detail around the specific ports going
into the RASH system is not available to the matching system, and
thus the setting can only be available at the MPID level for these
protocols. By contrast, OUCH and FLITE are order entry protocols for
the matching system itself, and so that level of detail is
available.
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The first of these changes relates to incoming Post-Only Orders
that lock or cross a Protected Quotation. Currently, Rule
3301A(b)(4)(A) states that, if a Post-Only Order would lock or cross a
Protected Quotation, the price of the Order will first be adjusted. If
the Order is Attributable,\11\ its adjusted price will be one minimum
price increment lower than the current Best Offer (for bids) or higher
than the current Best Bid (for offers). If the Order is not
Attributable, its adjusted price will be equal to the current Best
Offer (for bids) or the current Best Bid (for offers). However, the
Order will not post or execute until the Order, as adjusted, is
evaluated with respect to Orders on the Exchange Book. The Exchange
proposes to amend the behavior for both incoming Non-Attributable and
Attributable Post-Only Orders that lock or cross a Protected Quotation
on an away market center. In both cases, the Post-Only Order may be
either adjusted or cancelled back to the Participant, depending on the
Participant's choice. However, the Post-Only Order will execute if (i)
it is priced below $1.00 and the value of price improvement associated
with executing against an Order on the Exchange Book (as measured
against the original limit price of the Order) equals or exceeds the
sum of fees charged for such execution and the value of any rebate that
would be provided if the Order posted to the Exchange Book and
subsequently provided liquidity, or (ii) it is priced at $1.00 or more
and the value of price improvement associated with executing against an
Order on the Exchange Book (as measured against the original limit
price of the Order) equals or exceeds $0.01 per share. As with the
current rule text, the price of the Order will first be adjusted if the
Participant elects to have the Post-Only Order adjusted (instead of
being cancelled). Similarly, if the Order is Attributable, its adjusted
price will be one minimum price increment lower than the current Best
Offer (for bids) or higher than the current Best Bid (for offers). If
the Order is not Attributable, its adjusted price will be equal to the
current Best Offer (for bids) or the current Best Bid (for offers).
However, the Order will not post or execute until the Order, as
adjusted, is evaluated with respect to Orders on the Exchange Book.
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\11\ As set forth in Rule 3301B(i), an Order with
``Attribution'' is referred to as an ``Attributable Order'' and an
Order without attribution is referred to as a ``Non-Attributable
Order.'' Rule 3301B(i) defines Attribution as an Order Attribute
that permits a Participant to designate that the price and size of
the Order will be displayed next to the Participant's MPID in market
data disseminated by the Exchange.
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In addition to offering the new cancel functionality where an
incoming Post-Only Order locks or crosses a Protected Quotation on an
away market center, the Exchange proposes to amend Rule 3301A(b)(4)(A)
to state when that Order would execute, as described above. The
Exchange proposes this change because it believes that the instances
pursuant to which a locking or crossing Post-Only order will execute in
other scenarios (such as a Post-Only Order that locks or crosses a
Displayed Order at its displayed price on the Exchange Book) also apply
here, e.g., the execution of the Post-Only Order would be economically
beneficial to the Participant that entered the Order while contributing
to the price discovery process.
The second change relates to the adjusted price of the Post-Only
Order if that price would lock or cross an Order on the Exchange Book.
Currently, Rule 3301A(b)(4)(A) states that, if the adjusted price of
the Post-Only Order would lock or cross an Order on the
[[Page 20535]]
Exchange Book, then the Post Only Order will be repriced, ranked, and
displayed at one minimum price increment below the current best price
to sell on the Exchange Book (for bids) or above the current best price
to buy on the Exchange Book (for offers). However, the Post-Only Order
will execute if: (i) It is priced below $1.00 and the value of price
improvement associated with executing against an Order on the Exchange
Book (as measured against the original limit price of the Order) equals
or exceeds the sum of fees charged for such execution and the value of
any rebate that would be provided if the Order posted to the Exchange
Book and subsequently provided liquidity, or (ii) it is priced at $1.00
or more and the value of price improvement associated with executing
against an Order on the Exchange Book (as measured against the original
limit price of the Order) equals or exceeds $0.01 per share.
The Exchange proposes to amend this provision to apply to a
scenario in which the adjusted price of the Post-Only Order would lock
or cross a Displayed Order at its displayed price on the Exchange Book.
The proposal would also allow the Post-Only Order to either be adjusted
or be cancelled back to the Participant in this scenario, depending on
the Participant's choice. As with the current language of this section,
however, the Post-Only Order will execute if: (i) It is priced below
$1.00 and the value of price improvement associated with executing
against an Order on the Exchange Book (as measured against the original
limit price of the Order) equals or exceeds the sum of fees charged for
such execution and the value of any rebate that would be provided if
the Order posted to the Exchange Book and subsequently provided
liquidity, or (ii) it is priced at $1.00 or more and the value of price
improvement associated with executing against an Order on the Exchange
Book (as measured against the original limit price of the Order) equals
or exceeds $0.01 per share. If the Participant elects to have the Post-
Only Order adjusted, the Order will continue to be treated as specified
today in the Rule, so that the Post- Only Order will be repriced,
ranked, and displayed at one minimum price increment below the current
best displayed price to sell on the Exchange Book (for bids) or above
the current best displayed price to buy on the Exchange Book (for
offers).
The third change relates to a Post-Only Order that would not lock
or cross a Protected Quotation but would lock or cross an Order on the
Exchange Book. Currently, Rule 3301A(b)(4)(A) states that such an Order
will be repriced, ranked, and displayed at one minimum price increment
below the current best-priced Order to sell on the Exchange Book (for
bids) or above the current best-priced Order to buy on the Exchange
Book (for offers). However, the Post-Only Order will execute if: (i) It
is priced below $1.00 and the value of price improvement associated
with executing against an Order on the Exchange Book equals or exceeds
the sum of fees charged for such execution and the value of any rebate
that would be provided if the Order posted to the Exchange Book and
subsequently provided liquidity, or (ii) it is priced at $1.00 or more
and the value of price improvement associated with executing against an
Order on the Exchange Book equals or exceeds $0.01 per share.
The Exchange proposes to amend this provision so that it applies
where a Post-Only Order would not lock or cross a Protected Quotation
but would lock or cross a Displayed Order at its displayed price on the
Exchange Book. The Exchange proposes that, in this scenario, the Order
may either be adjusted or be cancelled back to the Participant,
depending on the Participant's choice. However, the Post-Only Order
will execute if: (i) It is priced below $1.00 and the value of price
improvement associated with executing against an Order on the Exchange
Book (as measured against the original limit price of the Order) equals
or exceeds the sum of fees charged for such execution and the value of
any rebate that would be provided if the Order posted to the Exchange
Book and subsequently provided liquidity, or (ii) it is priced at $1.00
or more and the value of price improvement associated with executing
against an Order on the Exchange Book (as measured against the original
limit price of the Order) equals or exceeds $0.01 per share. If the
Participant elects to have the Post Only-Order adjusted, the Post-Only
Order will be repriced, ranked, and displayed at one minimum price
increment below the current best-priced Displayed Order to sell on the
Exchange Book (for bids) or above the current best-priced Displayed
Order to buy on the Exchange Book (for offers).\12\
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\12\ The Exchange proposes to make a corresponding change to
Rule 3301A(b)(4)(A). The Exchange proposes to amend a provision of
the Rule relating to the treatment of Post-Only Orders during the
Pre-Market and Post-Market Hours. Currently, that provision states
that, during Pre-Market and Post-Market Hours, a Post-Only Order
will be processed in a manner identical to Market Hours with respect
to locking or crossing Orders on the Exchange Book, but will not
have its price adjusted with respect to locking or crossing the
quotations of other market centers. The Exchange proposes to amend
this language to provide that a Post-Only Order that locks or
crosses the quotation of another market center during the Pre-Market
and Post-Market Hours will not be cancelled or have its price
adjusted. The purpose of the proposed functionality is to allow a
Participant to cancel its Post-Only Order in various circumstances
rather than have that Order adjusted. To the extent that a Post-Only
Order will not have its price adjusted if it locks or crosses the
quotation of another market center during the Pre-Market or Post-
Market Hours, there is not a need to offer the corresponding cancel
functionality.
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The Exchange believes that the foregoing proposals will benefit
liquidity providers and the market in general by, among other things,
providing Participants with greater flexibility when managing their
order flow, and thereby promoting the more efficient execution of
Orders. In some circumstances, a market maker may have its order price
adjusted due to locking or crossing an away market price (i.e., the
displayed NBBO without the Exchange) or it may have its order price
adjusted due to locking or crossing a Displayed Order on the Exchange
Book. In many cases, these liquidity providers do not want to have
their price adjusted and would rather have their order cancelled so
that they can reevaluate the market conditions at the time. The
Exchange believes that providing market makers with flexibility to
cancel in this circumstance will increase efficiency and reduce message
traffic both internal to the Exchange and for external data feed
consumers.
The Exchange also proposes to add a provision to Rule 3301A(b)(4)
that addresses the treatment of Post-Only Orders that would not lock or
cross a Protected Quotation but would lock or cross a Non-Displayed
Order on the Exchange Book. In that circumstance, the Exchange proposes
that the Post-Only Order will be posted, ranked, and displayed at its
limit price. Once again, however, the Post-Only Order will execute in
this instance if: (i) It is priced below $1.00 and the value of price
improvement associated with executing against an Order on the Exchange
Book (as measured against the original limit price of the Order) equals
or exceeds the sum of fees charged for such execution and the value of
any rebate that would be provided if the Order posted to the Exchange
Book and subsequently provided liquidity, or (ii) it is priced at $1.00
or more and the value of price improvement associated with executing
against an Order on the Exchange Book (as measured against the original
limit price of the Order) equals or exceeds $0.01 per share.
By allowing a Post-Only Order that is entered with a price equal to
a resting Non-Display Order to be posted at its
[[Page 20536]]
limit price rather than being re-priced, the Exchange will allow the
Post Only Order to lock the resting Non-Display Order.\13\ Both the
Displayed Post-Only Order and the resting Non-Display Order will remain
available for execution at the locking price. In this way, neither
Order will be disadvantaged and the Exchange's bid/offer spread will be
tightened. In this scenario, efficacy will be maintained or enhanced
for both the Participant entering the Post-Only Order and the
Participant entering the Non-Displayed Order.
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\13\ The Exchange believes that this condition is consistent
with the Regulation NMS prohibition on locked and crossed markets
because the Exchange will not be displaying a locked market.
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In addition to the above, the Exchange proposes to add a provision
to Rule 3301A(b)(4) to address the scenario in which the adjusted price
of a Post-Only Order would lock or cross a Non-Displayed \14\ price on
the Exchange Book. The proposal would specify that in that
circumstance, the Post-Only Order will be posted in the same manner as
a Price to Comply Order.\15\ However, the Post-Only Order will execute
in this instance if: (i) It is priced below $1.00 and the value of
price improvement associated with executing against an Order on the
Exchange Book (as measured against the original limit price of the
Order) equals or exceeds the sum of fees charged for such execution and
the value of any rebate that would be provided if the Order posted to
the Exchange Book and subsequently provided liquidity, or (ii) it is
priced at $1.00 or more and the value of price improvement associated
with executing against an Order on the Exchange Book (as measured
against the original limit price of the Order) equals or exceeds $0.01
per share. This provision, which exists on Nasdaq and BX,\16\ will help
to reduce the information leakage that would otherwise occur when a
Post-Only Order re-prices to avoid locking or crossing the price of a
Non-Displayed Order resting on the Exchange's book.
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\14\ A ``Non-Displayed Order'' is an Order Type that is not
displayed to other Participants, but nevertheless remains available
for potential execution against incoming Orders until executed in
full or cancelled. In addition to the Non-Displayed Order Type,
there are other Order Types that are not displayed on the PSX Book.
Thus, ``Non-Display'' is both a specific Order Type and an Order
Attribute of certain other Order Types. See Rule 3301A(b)(3)(A).
\15\ Pursuant to Rule 3301A(b)(1), a ``Price to Comply Order''
is an Order Type designed to comply with Rule 610(d) under
Regulation NMS by avoiding the display of quotations that lock or
cross any Protected Quotation in a System Security during Market
Hours. The Price to Comply Order is also designed to provide
potential price improvement. When a Price to Comply Order is
entered, the Price to Comply Order will be executed against
previously posted Orders on the Exchange Book that are priced equal
to or better than the price of the Price to Comply Order, up to the
full amount of such previously posted Orders, unless such executions
would trade through a Protected Quotation. Any portion of the Order
that cannot be executed in this manner will be posted on the
Exchange Book (and/or routed if it has been designated as routable).
During Market Hours, the price at which a Price to Comply Order is
posted is determined in the following manner. If the entered limit
price of the Price to Comply Order would lock or cross a Protected
Quotation and the Price to Comply Order could not execute against an
Order on the Exchange Book at a price equal to or better than the
price of the Protected Quotation, the Price to Comply Order will be
displayed on the PSX Book at a price one minimum price increment
lower than the current Best Offer (for a Price to Comply Order to
buy) or higher than the current Best Bid (for a Price to Comply
Order to sell) but will also be ranked on the Exchange Book with a
Non-Displayed price equal to the current Best Offer (for a Price to
Comply Order to buy) or to the current Best Bid (for a Price to
Comply Order to sell). During Pre-Market Hours and Post-Market
Hours, a Price to Comply Order will be ranked and displayed at its
entered limit price without adjustment.
\16\ See Nasdaq Rule 4702(b)(4)(A), BX Rule 4702(b)(4)(A).
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The Exchange notes that the foregoing proposals add functionalities
to the Post-Only Order that are currently offered by other exchanges,
including the Exchange's affiliates, Nasdaq and BX. Indeed, the
proposed changes to Rule 3301A(b)(4) mirror language that currently
exists in both Nasdaq and BX Rules 4702(b)(4) and the rationales that
the Exchange puts forth for those changes mirror those proffered by
Nasdaq and BX.\17\
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\17\ See Securities Exchange Act Release No. 34-79290 (Nov. 10,
2016), 81 FR 81184 (Nov. 17, 2016) (SR-NASDAQ-2016-111); Securities
Exchange Act Release No. 34-80630 (May 9, 2017), 82 FR 22364 (May
15, 2017) (SR-NASDAQ-2017-043); Securities Exchange Act Release No.
79290 (November 10, 2016), 81 FR 81184 (November 17, 2016) (SR-BX-
2016-046).
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Minimum Quantity
As set forth in Rule 3301B(e), ``Minimum Quantity'' is an Order
Attribute that allows a Participant to provide that an Order will not
execute unless a specified minimum quantity of shares can be obtained.
Thus, the functionality serves to allow a Participant that may wish to
buy or sell a large amount of a security to avoid signaling its trading
interest unless it can purchase a certain minimum amount. An Order with
a ``Minimum Quantity'' Order Attribute may be referred to as a
``Minimum Quantity Order.''
The Exchange proposes to amend Rule 3301B(e) to provide a
Participant with two choices as to how the Exchange will process a
Minimum Quantity Order at the time of entry. First, the Exchange
proposes that the Participant may specify that the Minimum Quantity
condition may be satisfied by execution against multiple Orders. In
that case, upon entry, the Exchange's System would determine whether
there were one or more posted Orders executable against the incoming
Order with an aggregate size of at least the minimum quantity. If there
were not, the Order would post on the Exchange Book in accordance with
the characteristics of its underlying Order Type.
Second, the Exchange proposes that Participant may specify that the
Minimum Quantity condition must be satisfied by execution against one
or more Orders, each of which must have a size that satisfies the
Minimum Quantity condition. If there are such Orders but there are also
other Orders that do not satisfy the Minimum Quantity condition, the
Minimum Quantity Order will execute against Orders on the PSX Book in
accordance with Rule 3307(a) (pertaining to execution priority) until
it reaches an Order that does not satisfy the minimum quantity
condition, and then the remainder of the Order will be cancelled. For
example, if a Participant entered an Order to buy at $11 with a size of
1,500 shares and a minimum quantity condition of 500 shares, and there
were three Orders to sell at $11 on the PSX Book, two with a size of
500 shares each and one with a size of 200 shares, with the 200 share
Order ranked in time priority between the 500 share Orders, the 500
share Order with the first time priority would execute and the
remainder of the Minimum Quantity Order would be cancelled.
Alternatively, if the Order would lock or cross Orders on the PSX Book
but none of the resting Orders would satisfy the minimum quantity
condition, an Order with a minimum quantity condition to buy (sell)
will be repriced to one minimum price increment lower than (higher
than) the lowest price (highest price) of such Orders. For example, if
there was an Order to buy at $11 with a minimum quantity condition of
500 shares, and there were resting Orders on the PSX Book to sell 200
shares at $10.99 and 300 shares at $11, the Order would be repriced to
$10.98 and ranked at that price.
Again, the foregoing proposed changes to Rule 3301B(e) mirror
language that exists for the same Order Attribute in the Nasdaq and BX
rulebooks.\18\
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\18\ See Securities Exchange Act Release No. 34-75252 (June 22,
2015), 80 FR 36865 (June 26, 2015) (SR-NASDAQ-2015-024); Securities
Exchange Act Release No. 34-84012 (August 31, 2018), 83 FR 45476
(September 7, 2018) (SR-BX-2018-040).
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[[Page 20537]]
Trade Now
The Exchange proposes to amend Rules 3301A and 3301B to add a
``Trade Now'' instruction to certain order types. The Exchange will
offer this functionality--which is presently available on Nasdaq and BX
\19\--through its OUCH, RASH, FLITE, and FIX protocols. This
instruction will provide resting Orders with a greater ability to
receive an execution when that resting Order is locked by a Displayed
Order. The Trade Now instruction will allow participants to enter an
instruction to have a locked or crossed resting buy (sell) Order
execute against the locking or crossing sell (buy) order as a liquidity
taker. Depending on the protocol used by the participant to access the
Exchange's system, the participant may either specify that the Order
execute against locking interest automatically, or the participant may
be required to send a Trade Now instruction to the Exchange once the
Order has become locked. The Exchange is offering the Trade Now
instruction for all Orders that may be sent to and may be locked or
crossed by a Displayed Order on the continuous Exchange book, and will
not offer the instruction for Orders that do not execute and will not
be locked by a Displayed Order on the continuous book.\20\
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\19\ See Nasdaq Rules 4702(b) and 4703(m) and BX Rules 4702(b)
and 4703(l).
\20\ The Exchange proposes to amend Rule 3301A(b) to specify
that Trade Now functionality is available for Price to Comply
Orders, Non-Displayed Orders, Post-Only Orders, and Midpoint Peg
Post-Only Orders. The Exchange notes that it does not intend to make
Trade Now Available for Price to Display Orders or Market Maker Peg
Orders, as it is presently on Nasdaq and BX, because Trade Now
functionality is intended to apply to non-displayed Orders only, and
would not be invoked for Price to Display and Market Maker Peg
Orders, which are displayed order types. Nasdaq and BX plan to
separately propose to amend their respective rules to remove Trade
Now functionality from their Price to Display and Market Maker Peg
order types.
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When a Trade Now instruction is applied to a resting buy (sell)
Order, the Order will execute against the available size of the locking
or crossing sell (buy) Order as the liquidity taker. The following
example illustrates this scenario:
Participant A enters a Non-Display buy order for 200
shares at $10, and specifies the Trade Now instruction;
Participant B enters a Post Only sell Order for 100 shares
at $10;
The Post Only Order is posted at $10 and locks the Non-
Display Order;
The buy Order will execute for 100 shares at $10 as the
remover of liquidity.
If a buy (sell) Order with the Trade Now instruction is only
partially executed, the unexecuted portion of that Order remains on the
Exchange book and maintains its priority.
Depending on the interface being used by the participant, the Trade
Now attribute may either allow the order to execute against locking or
crossing interest automatically (``Reactive Trade Now''), or the
participant may be required to send a Trade Now instruction to the
Exchange once the Order has become locked (``Non-Reactive Trade Now'').
All Orders that are entered through the RASH and FIX protocols with a
Trade Now Order Attribute will be Reactive Trade Now, and those Orders
shall execute against locking interest automatically.
The Reactive Trade Now instruction will be available on an Order-
by-Order basis, and will also be available as an optional port level
setting. If the Reactive Trade Now setting is enabled on a specific
port, all Orders entered via the specific port will, by default, be
designated with the Reactive Trade Now instruction. If the Reactive
Trade Now setting is enabled on a specific port, participants will have
the ability to designate on an Order-by-Order basis that a particular
Order entered via the specific port will not be designated with the
Reactive Trade Now instruction, thereby overriding the port level
setting for the Order. If the Reactive Trade Now instruction is
specified for an Order for which the Trade Now instruction does not
apply, the system will not invoke the Trade Now instruction for that
Order.
In contrast, Orders entered through the OUCH and FLITE protocols
will use the Non-Reactive Trade Now functionality, and participants
must send the Trade Now instruction after the order becomes locked. If
a participant enters a Non-Reactive Trade Now instruction when there is
no locking or crossing interest, the instruction will be ignored by the
System and the order will remain on the Exchange Book with the same
priority.
The Non-Reactive Trade Now instruction will be available to
participants on an Order-by-Order basis. If the Non-Reactive Trade Now
instruction is entered for an Order for which the Trade Now instruction
does not apply, the System will not invoke the Trade Now instruction
for that Order.
The Exchange is offering two different variations of the Trade Now
instruction to reflect the differences in behavior among participants
who use the different Exchange protocols. For example, the Exchange
typically assumes a more active role in managing the order flow
submitted by users of the RASH and FIX protocols. Allowing these
participants to use the Reactive Trade Now instruction at the time of
Order entry will allow for the automatic execution of Orders, and
reflects the order flow management practices of these participants. In
contrast, users of the OUCH and FLITE protocols generally assume a more
active role in managing their Order flow. Offering the Non-Reactive
Trade Now instruction for these protocols, and its requirement that the
instruction must be sent after the Order becomes locked or crossed,
reflects the order flow management practices of these participants.
Midpoint Peg Post-Only Orders and Orders With Midpoint Pegging
The Exchange proposes to amend Rule 3301A and Rule 3301B to
discontinue executing Orders with Midpoint Pegging when the NBBO is
crossed, as well as to specify the behavior of Midpoint Peg Post-Only
Orders and Orders with Midpoint Pegging when the market is crossed or
when there is no best bid and/or offer. The Exchange also proposes to
change certain references to cancelling or rejecting orders in Rule
3301A and Rule 3301B.
Today, the Exchange executes Orders with Midpoint Pegging when the
NBBO is locked by executing at the locking price and when the NBBO is
crossed by executing at the midpoint of the crossed price.\21\ Based on
feedback from members and the practice of other exchanges,\22\ the
Exchange has determined that its current practice of executing Orders
with Midpoint Pegging during such crossed markets produces sub-optimal
execution prices for members and investors. The midpoint of a crossed
market is not a clear and accurate indication of a valid price, nor is
it indicative of a fair and orderly market. The better practice is to
simply not execute Midpoint Orders during crossed markets. To
accomplish this, the Exchange proposes to add language to Rule
3301A(b)(6)(B) for Midpoint Peg Post-Only Orders entered through RASH
or FIX, whereby, if the Order is on the System Book and subsequently
the NBBO is crossed, or if there is subsequently no NBBO, the Order
will be removed from the System Book and will be reentered at the new
Midpoint once there is a valid NBBO that is not
[[Page 20538]]
crossed.\23\ At present, Midpoint Peg Post-Only Orders entered through
RASH or FIX are repriced to the Midpoint of the NBBO if the NBBO
subsequently becomes crossed or are cancelled if there is subsequently
no NBBO. The Exchange is proposing to re-enter such Orders at the new
Midpoint once there is a NBBO that is not crossed because the new NBBO
is indicative of a valid price.
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\21\ See Rule 3301B(d).
\22\ See, e.g., Cboe BZX Rule 11.9(c)(9) (no midpoint execution
during crossed market); NYSE Arca Rule 7.31-E(d)(3) (no midpoint
execution when the market is locked or crossed); Nasdaq Rule
4703(d).
\23\ The Exchange proposes to amend Rule 3301A(b)(6)(A) to
specify that it will not accept new Midpoint Peg Post-Only Orders
while the NBBO is crossed or there is no NBBO.
---------------------------------------------------------------------------
Similarly, the Exchange proposes to add language to Rule 3301B(d)
\24\ for Orders entered through RASH or FIX with Midpoint Pegging,
whereby, if the Order is on the System Book and the Inside Bid and
Inside Offer are subsequently crossed, or if there is subsequently no
Inside Bid and/or Inside Offer, the Order will be removed from the
System Book and will be reentered at the new Midpoint once there is a
valid Inside Bid and Inside Offer that is not crossed. At present,
Midpoint Pegged Orders entered through RASH or FIX are repriced to the
Midpoint of the Inside Bid and Inside Offer if the Inside Bid and
Inside Offer subsequently becomes crossed or are cancelled if there is
subsequently no Inside Bid and/or Inside Offer. As with the change to
Midpoint Peg Post-Only Orders, the Exchange is proposing to re-enter
such Orders at the new Midpoint once there is an Inside Bid and Inside
Offer that is not crossed because the new Midpoint of the Inside Bid
and Inside Offer is indicative of a valid price.
---------------------------------------------------------------------------
\24\ Also in Rule 3301B(d), the Exchange proposes to clarify
that, even if the Inside Bid and Inside Offer are locked, an Order
with Midpoint Pegging that locked an Order on the PSX Book would
execute ``(provided, however, that a Midpoint Peg Post-Only Order
would execute or post as described in Rule 3301A(b)(6)(A)).'' This
clarification avoids confusion as to circumstances in which an Order
with Midpoint Pegging would execute. The proposal also would conform
the Exchange's Rule with the corresponding Nasdaq Rule 4703(d).
The Exchange furthermore proposes to amend Rule 3301B(d) to
specify that it will not accept new Midpoint Peg Post-Only Orders
while the NBBO is crossed or there is no NBBO.
---------------------------------------------------------------------------
The Exchange is proposing to re-enter Orders submitted through RASH
or FIX because the Exchange typically assumes a more active role in
managing the order flow submitted by users of these protocols, and this
functionality reflects the order flow management practices of these
participants.
While the Exchange is only proposing to adopt this re-entry
functionality for Orders that are entered through RASH or FIX, the
Exchange believes that it is appropriate to also modify the treatment
of Midpoint Peg Post-Only Orders and Orders with Midpoint Pegging
entered through OUCH or FLITE where the NBBO subsequently becomes
crossed, or there is subsequently no NBBO or Inside Bid and/or Offer.
Accordingly, the Exchange proposes to amend Rule 3301A(b)(6)(B) to
state that if, after a Midpoint Peg Post-Only Order entered through
OUCH or FLITE is posted to the System Book, the Midpoint Peg Post-Only
Order will be cancelled back to the Participant if any of the following
conditions are met:
There is no National Best Bid and/or National Best Offer;
The Order to buy (sell) is entered with a limit price
above (below) the Midpoint of the NBBO and is ranked at the Midpoint of
the NBBO; thereafter, the NBBO changes so that the Midpoint changes and
the Order is no longer at the NBBO Midpoint;
The Order to buy (sell) is entered at a limit price that
is equal to or less than (greater than) the Midpoint of the NBBO and is
ranked at its limit price and thereafter, the NBBO changes so that the
Midpoint of the NBBO 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 of the NBBO and is
ranked at its limit price, thereafter the NBBO becomes crossed, such
that the Midpoint of the crossed NBBO 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 Midpoint Peg Post-Only Order; or
The Order to buy (sell) is entered at a limit price that
is greater than (less than) the Midpoint of the NBBO and is therefore
ranked at the Midpoint of the NBBO, thereafter the NBBO becomes 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 NBBO.
The Exchange believes that the proposed language captures the new
System behavior and further clarifies the current behavior as described
in Rule 3301A(b)(6)(B) by the language:
If, after being posted to the System book, the NBBO changes so
that midpoint between the NBBO is lower than (higher than) the price
of a Midpoint Peg Post-Only Order to buy (sell), the Midpoint Peg
Post-Only Order will be cancelled back to the Participant.
The proposed language is more precise than the existing language
because it draws specific attention to a Midpoint Peg Post-Only Order
that posts to the System Book at its limit price verses a Midpoint Peg
Post-Only Order with a limit price that is adjusted to post to the
System Book at the Midpoint of the NBBO. Where the NBBO shifts after an
Order to buy (sell) posts at its limit such that the Midpoint of the
NBBO remains or becomes higher (lower) than the limit price of that
Order, cancellation of the Order is unnecessary because the Order can
simply remain on the Exchange Book at its limit price, while an Order
that has posted at a price lower (higher) than its limit price will be
cancelled following any change to the Midpoint of the NBBO.
Likewise, the new proposed language specifies the context under
which a Midpoint Peg Post-Only Order will be cancelled when the NBBO
subsequently becomes crossed. Specifically, when a Midpoint Peg Post-
Only Order to buy (sell) posts at its limit price, then the NBBO
subsequently becomes crossed but the Midpoint of the crossed NBBO
remains equal to or higher (lower) than the limit price of the Order to
buy (sell), the Order will only be cancelled if a new sell (buy) Order
is received at a price that locks or crosses the limit price of the
resting Order. Furthermore, the proposed language specifies that when
the limit price of a Midpoint Peg Post-Only Order to buy (sell) is
greater than (less than) the Midpoint of the NBBO and therefore posts
at the Midpoint of the NBBO, then the NBBO subsequently becomes crossed
but the Midpoint of the crossed NBBO does not change, the Exchange will
only cancel the Order if the Exchange receives a new sell (buy) Order
at a price that locks or crosses the Midpoint of the NBBO. Other than
in these two circumstances, cancellation of an Order simply because the
NBBO crosses is unnecessary. When an Order to buy (sell) is ranked at
its limit price, and the NBBO becomes crossed while the Midpoint
remains 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 NBBO could uncross prior to the Order
executing. Likewise, when an Order to buy (sell) is ranked at the
Midpoint of the NBBO, then the NBBO becomes 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 NBBO could uncross (with the Midpoint still remaining unchanged)
prior to the Order executing.
Similarly, the Exchange proposes to amend Rule 3301B(d) to state
that, after an Order with Midpoint Pegging entered through OUCH or
FLITE is posted to the System Book, the Order with Midpoint Pegging
will be cancelled back to the
[[Page 20539]]
participant 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, then 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;
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, then 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.
Again, the Exchange believes that the proposed language captures the
new System behavior and further clarifies the current behavior as
described in Rule 3301B(d) by the language:
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.\25\
The Exchange intends for the proposed amendment to ensure consistency
in the rationale and language between Rule 3301B(d) and the amended
Rule 3301A(b)(6)(B) described above.\26\
---------------------------------------------------------------------------
\25\ To enhance the consistency of the Rule, the Exchange
proposes to change references from the term ``NBBO'' to ``Inside Bid
and Inside Offer.''
\26\ Additionally, to avoid confusion, the Exchange proposes to
amend Rule 3301A(b)(6)(A) to clarify that a Midpoint Peg Post-Only
Order in the Rule's example is an Order to buy.
---------------------------------------------------------------------------
The Exchange also proposes to delete the following language from Rule
3301A(b)(3)(B), which describes the Non-Display Order Type:
If a Non-Displayed Order entered through OUCH or FLITE is
assigned a Midpoint Pegging Order Attribute, and if, after being
posted to the PSX 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).
This language describes the behavior of a Non-Displayed Order with
a Midpoint Pegging Attribute enabled, which is duplicative of the
general description of the behavior of a Midpoint Pegging Attribute in
Rule 3301B(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 3301B(d).
Examples
Below are examples of the operation of the proposed amendments to
Rules 3301B(d) and 3301A(b)(6)(B) with respect to the cancellation of
Midpoint Peg Post-Only Orders and Orders with Midpoint Pegging entered
through OUCH or FLITE.
1. There is no National Best Bid and/or National Best Offer.
The National Best Bid (``NBB'') is $11.00 and the National Best
Offer (``NBO'') is $11.06. A Midpoint Peg Post-Only Order to buy is
posted at the Midpoint between the NBBO, at $11.03. At this point, all
displayed liquidity on the sell side is reported to be removed by all
Market Centers, such that an NBO no longer exists. In this
circumstance, the Midpoint Peg Post-Only Order will be cancelled back
to the Participant.
1. The Order to buy (sell) is entered with a limit price above
(below) the Midpoint of the NBBO and is ranked at the Midpoint of the
NBBO; thereafter, the NBBO changes so that the Order is no longer at
the NBBO Midpoint.
The NBB is $11.00 and the NBO is $11.06. A Midpoint Peg Post-Only
Order to buy is entered with a limit price of $11.04 and it posts at
the Midpoint between the NBBO, at $11.03. If the NBO later shifts to
$11.08, such that the Midpoint between the NBBO becomes $11.04, then
the Midpoint Peg Post-Only Order will be cancelled back to the
Participant.
2. The Order to buy (sell) is entered at a limit price that is
equal to or less than (greater than) the Midpoint of the NBBO and is
ranked at its limit price; thereafter, the NBBO changes so that the
Midpoint of the NBBO is lower (higher) than the limit price of the
Order.
The NBB is $11.00 and the NBO is $11.06. A Midpoint Peg Post-Only
Order to buy is entered with a limit price of $11.03 and it posts at
the Midpoint between the NBBO, at $11.03. If the NBO shifts thereafter
to $11.08, such that the Midpoint between the NBBO becomes $11.04, then
the Midpoint Peg Post-Only Order will remain on the Exchange Book
unchanged. If, however, the NBO later shifts to $11.04, such that the
Midpoint between the NBBO becomes $11.02, then the Midpoint Peg Post-
Only Order will be cancelled back to the Participant.
3. The Order to buy (sell) is ranked at its limit price and the
NBBO becomes crossed, such that the Midpoint of the crossed NBBO
remains equal to or higher (lower) than the limit price of the Order,
and a new sell (buy) Order is received at a price that locks or crosses
the limit price of the resting Midpoint Peg Post-Only Order.
The NBB is $11.00 and the NBO is $11.06. A Midpoint Peg Post-Only
Order to buy is entered with a limit price of $11.03 and it posts at
the Midpoint between the NBBO, at $11.03. Subsequently, if the NBB
shifts to $11.04, such that the Midpoint between the NBBO becomes
$11.05, then the Midpoint Peg Post-Only Order will remain on the
Exchange Book at its limit price of $11.03. If the NBO later shifts to
cross the market at $11.02, then the Midpoint between the crossed NBBO
will become $11.03 and the Midpoint Peg Post Only Order will remain on
the Exchange Book unchanged. If, however, a new sell Order is received
at $11.03 while the market is still crossed, then the Midpoint Peg Post
Only Order will be cancelled back to the participant without execution.
4. The Order to buy (sell) is ranked at the Midpoint of the NBBO
because the limit price of the Order is greater (less than) the
Midpoint and the NBBO becomes crossed but the Midpoint does not change,
then a new sell (buy) Order is received at a price that locks or
crosses the Midpoint of the NBBO.
The NBB is $11.00 and the NBO is $11.06. A Midpoint Peg Post-Only
Order to buy is entered with a limit price of $11.04 and it posts at
the Midpoint between the NBBO, at $11.03. Subsequently, if the NBB
shifts to $11.04 and the NBO simultaneously shifts to $11.02, thus
instantaneously crossing the market, then the Midpoint between the
crossed NBBO will remain at $11.03 and the Midpoint Peg Post Only Order
will remain on the Exchange Book unchanged. If, however, a new sell
[[Page 20540]]
Order is received at $11.03 while the market is still crossed, then the
Midpoint Peg Post Only Order will be cancelled back to the Participant
without execution.
Finally, the Exchange is proposing to change certain instances in
Rule 3301A and Rule 3301B that describe the cancellation or rejection
of an Order. For example, Rule 3301A(b)(6)(A) currently states that, if
the NBBO is locked when a Midpoint Peg Post-Only Order is entered, the
Midpoint Peg Post-Only Order will be priced at the locking price, if
the NBBO is crossed, it will nevertheless be priced at the midpoint
between the NBBO, and if there is no NBBO, the Order will be rejected.
Rule 3301A(b)(6)(A) also provides that a Midpoint Peg Post-Only Order
that would be assigned a price of $1 or less per share will be rejected
or cancelled, as applicable. Similarly, Rule 3301B(d) states that, in
the case of an Order with Midpoint Pegging, if the Inside Bid and
Inside Offer are locked, the Order will be priced at the locking price,
if the Inside Bid and Inside Offer are crossed, the Order will
nevertheless be priced at the midpoint between the Inside Bid and
Inside Offer, and if there is no Inside Bid and/or Inside Offer, the
Order will be rejected.
The Exchange proposes to change references to cancelling or
rejecting an Order to ``not accepting'' an Order. Depending on the
context, the reference to rejecting an Order may have one of two
meanings.\27\ The Exchange believes that changing references from
rejecting or cancelling an Order to not accepting an Order is
appropriate because the proposed language resolves the ambiguity that
may arise when referring to an Order rejection, and is sufficiently
broad to encompass the contexts in which the concept of Order rejection
or cancellation may be used.
---------------------------------------------------------------------------
\27\ Specifically, an Order may be referred to as ``rejected''
if it is not initially accepted by the customer-facing Exchange
interface. Alternatively, after an Order has been initially accepted
by the customer-facing interface and is being transmitted from one
Exchange interface to another, it may be ``rejected'' if the Order
is not accepted by another part of the Exchange System for various
reasons.
---------------------------------------------------------------------------
The foregoing proposed changes to Rule 3301A and 3301B mirror
language that exists for the same Order Types and Order Attribute in
the Nasdaq rulebook.\28\
---------------------------------------------------------------------------
\28\ See Securities Exchange Act Release No. 34-78908 (Sep 22,
2016), 81 FR 66702 (Sept 28, 2016) (SR-NASDAQ-2016-111); Securities
Exchange Act Release No. 34-80593 (May 4, 2017), 82 FR 21860 (May
10, 2017) (SR-NASDAQ-2017-042); Securities Exchange Act Release No.
34-86774 (Aug 27, 2019), 84 FR 46075 (Sept 3, 2019) (SR-NASDAQ-2019-
065).
---------------------------------------------------------------------------
* * * * *
The Exchange intends to implement its proposed rule change on or
before the end of the Second Quarter of 2020. The Exchange will
announce the new implementation date by an Equity Trader Alert, which
shall be issued prior to the implementation date.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\29\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\30\ 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.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Post-Only Orders
The Exchange is proposing to add a new functionality (cancelling a
Post-Only Order instead of adjusting its price) that is not currently
available on the Exchange, and that is consistent with functionalities
that are currently offered by other exchanges. The Exchange believes
that this new functionality is consistent with the Act because, as
discussed above, it will provide Participants with greater flexibility
when managing their order flow, which will promote the more efficient
execution of Orders. The proposal is also consistent with the stated
intent of the Post-Only Order, which is to avoid the display of
quotations that would lock or cross a Protected Quotation. The Exchange
believes that amending Rule 3301A(b)(4) to specify when an incoming
Post-Only Order that locks or crosses a Protected Quotation on an away
market center would execute is consistent with the Act because, as with
other the instances pursuant to which a locking or crossing Post-Only
Order will execute, the execution of the Post-Only Order would be
economically beneficial to the Participant that entered the Order while
contributing to the price discovery process.
Additionally, the proposal to allow Post-Only Orders to lock Non-
Display Orders under certain circumstances will benefit investors and
Participants by tightening bid/offer spreads, thereby enhancing
execution quality on the Exchange. Second, Participants entering Post-
Only Orders will be able to execute liquidity providing strategies more
efficiently as the Order will, in most cases, only be subjected to
price-sliding due to to a Protected Quotation on an away market center
or Displayed Orders on the Exchange Book, and not due to Non-Displayed
Orders, and not due to Non-Displayed Orders. Third, the proposed
changes--including the provision stating that the adjusted price of
Post-Only Orders that would lock or cross a Non-Displayed price will
post in the same manner as a Price to Comply Order--will improve the
interaction of Post-Only and Non-Display Orders as both Orders will be
eligible for execution and the information leakage created due to the
current interaction will be reduced. The Exchange believes the proposed
changes will have no detrimental impact on any Participant or class of
Participants, or on users of the Post-Only or Non-Display Order types
or on users of other order types offered by the Exchange.
Minimum Quantity
The proposal will provide Participants, including institutional
firms that ultimately represent individual retail investors in many
cases, with better control over their Orders, thereby providing them
with greater potential to improve the quality of their Order
executions. Currently, Rule 3301B(e) allows a Participant to designate
a minimum quantity on an Order that, upon entry, may aggregate multiple
executions to meet the minimum quantity requirement. Once posted to the
Exchange book, however, the minimum quantity requirement is equivalent
to a minimum execution size requirement. The Exchange now proposes to
provide a Participant with control over the execution of their Order
with Minimum Quantity by giving them an option to designate the minimum
individual execution size upon entry. The control offered by the
proposed change is consistent with the various types of control
currently provided by exchange order types. For example, the Exchange,
Nasdaq, BX and other exchanges offer limit orders, which allow a
Participant to control the price it will pay or receive for a stock.
Similarly, exchanges offer order types that allow market participants
to structure their trading activity in a manner that is more likely
avoid certain transaction cost-related economic outcomes. Moreover, as
noted above, other trading venues provide the very same functionality
that the Exchange is proposing.
Additionally, the Exchange notes that this functionality is one
that Participants--and in particular large institutional firms--have
requested to avoid transacting with smaller Orders that they believe
ultimately increase the cost of their transaction. The Exchange
[[Page 20541]]
notes that proposed new optional functionality may improve the Exchange
market by attracting more Order flow, which is currently trading on
less transparent venues that contribute less to price discovery and
price competition than executions and quotes that occur on lit
exchanges. Such new Order flow will further enhance the depth and
liquidity on the Exchange, which supports just and equitable principles
of trade. Furthermore, the proposed modification to the Minimum
Quantity Order Attribute is consistent with providing market
participants greater control over the nature of their executions so
that they may achieve their trading goals and improve the quality of
their executions.
Trade Now
The Exchange's proposal to offer Trade Now functionality is
consistent with the Act because Trade Now is an additional
functionality that will facilitate the execution of locked or crossed
Orders, thereby increasing the efficient functioning of the Exchange's
market. The Trade Now functionality is an optional feature, and is
designed to reflect both the objectives of the Exchange's market, and
the order flow management practices of various market participants. For
these reasons, the Trade Now functionality will only be made available
for Orders that are entered in and may be locked or crossed by a
Displayed Order on the continuous book, and, depending on the protocol,
will be offered as either the Reactive Trade Now or Non-Reactive Trade
Now functionality.
Midpoint Peg Post-Only Orders and Orders With Midpoint Pegging
The Exchange believes that the midpoint of a crossed market, or
where there is no NBBO (or Inside Bid and/or Inside Offer), is not a
clear and accurate indication of a valid price and may produce sub-
optimal execution prices for members and investors. As such, preventing
the execution of Midpoint-Pegged Orders when the NBBO is crossed or
where there is no NBBO (or Inside Bid and/or Inside Offer) will result
in higher overall execution quality for members. The proposal adopts
new functionality for Midpoint Peg Post-Only Orders and Orders with
Midpoint Pegging, after initial entry and posting to the System Book
and where the NBBO (or Inside Bid and Inside Offer) subsequently
becomes crossed or where there is subsequently no NBBO (or Inside Bid
and/or Inside Offer). Furthermore, the amendments reflect the order
flow management practices of participants who have selected from the
available order submission protocols, e.g., cancelling and re-
submitting such Orders that are entered through RASH or FIX; cancelling
Orders that are submitted through OUCH or FLITE in the case of no NBBO
(or Inside Bid and/or Inside Offer); or canceling Orders that are
submitted through OUCH or FLITE when the NBBO (or Inside Bid and Inside
Offer) becomes crossed and a new Order is received that locks or
crosses the price at which the Midpoint Pegged Order is resting.
Furthermore, the proposal protects investors by clearly describing
the circumstances in which the Exchange will not cancel Midpoint-Pegged
Orders entered using OUCH or FLITE. That is, the Exchange believes that
the concept of a limit price fairly implies that the Exchange has no
need to cancel a Midpoint-Pegged Order to buy (sell) when such an Order
is posted at its limit price and the NBBO (or Inside Bid and Inside
Offer) shifts thereafter but the Midpoint remains above (below) the
limit price. The proposal explains that the Exchange will cancel a
Midpoint-Pegged Order posted at its limit price if the NBBO (or Inside
Bid and Inside Offer) shifts after entry such that the Midpoint becomes
lower (higher) than the limit price. In this circumstance, 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, the Exchange believes it is helpful to investors to
clarify the circumstances in which the Exchange does and does not
cancel Midpoint-Pegged Orders, entered using OUCH or FLITE, when the
market becomes crossed. Although cancellation is warranted to prevent
Orders from actually executing in a crossed market, the Exchange does
not believe cancellation is warranted simply because the markets cross
so long as a possibility remains for the markets to become uncrossed
again 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 NBBO (or Inside Bid and Inside
Offer) becomes crossed thereafter while the Midpoint remains equal to
or more aggressive than its limit price, so long as a new sell (buy)
Order is not received that locks or crosses the limit price of the
resting Midpoint-Pegged Order. 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 NBBO (or Inside Bid and Inside
Offer) when the market becomes crossed, provided that while the market
is crossed, the Midpoint of the crossed NBBO (or Inside Bid and Inside
Offer) does not change \31\ and the Exchange does not receive a new
Order that would lock or cross the Midpoint. Cancellation is
unnecessary in these scenarios because the Midpoint-Pegged Order can
continue to rest at its limit price or the Midpoint, respectively,
while the market is crossed and because the market may become uncross
again without triggering a cancelation condition.
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\31\ If at any point after the Midpoint-Pegged Order posts to
the Exchange Book at the Midpoint, the NBBO (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.
---------------------------------------------------------------------------
The Exchange believes that the proposed clarifying changes and
revised rule text under Rule 3301A(b)(6)(A) are consistent with the Act
because they will help avoid investor confusion that may be caused by
not clarifying that a Midpoint Peg Post-Only Order in the Rule's
example is an Order to buy.
Finally, the proposal to remove duplicative language from Rule
3301A(b)(3)(B), pertaining to Non-Displayed Orders with Midpoint
Pegging, is consistent with the Act because the affected language is
also stated in Rule 3301B(d) and it will reduce the possibility of
future inconsistencies. Also, replacing certain references to rejecting
or cancelling an Order to ``not accepting'' an Order is consistent with
the Act because the proposed language encompasses the contexts in which
the concept of order rejection or cancellation may be used and resolves
any ambiguity that may arise when referring to an Order rejection.
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.
Post-Only
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 Post-Only Order is an
optional Order Type that is available for entry through multiple
Exchange Order entry protocols. No Participant is required to use any
specific Order Type or Attribute or even to use any Exchange Order Type
or Attribute or any Exchange functionality at all. If an Exchange
[[Page 20542]]
Participant believes for any reason that the proposed rule change will
be detrimental, that perceived detriment can be avoided by choosing not
to enter or interact with the Order Types modified by this proposed
rule change. The proposed changes are pro-competitive, moreover,
because they will provide Participants with a functionality that is not
currently available on the Exchange, and that is consistent with
functionalities that are currently offered by other exchanges. The
proposed changes will apply equally to all Orders that meet the
proposed criteria. This functionality will facilitate the more
efficient execution of order flow, which could increase the Exchange's
market quality and thereby promote competition by attracting additional
liquidity to the Exchange.
Minimum Quantity
The proposed change to the Minimum Quantity Order Attribute will
allow Participants to condition the processing of their Orders based on
a minimum execution size. The changes to the Minimum Quantity Order
Attribute will enhance the functionality offered by the Exchange to
Participants, thereby promoting its competitiveness with other
exchanges and non-exchange trading venues that already offer the same
or similar functionality. As a consequence, the proposed change will
promote competition among exchanges and their peers, which, in turn,
will decrease the burden on competition rather than place an
unnecessary burden thereon.
Trade Now
The Exchange does not believe that its proposal to adopt Trade Now
functionality will impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. This is an
optional functionality, and which may be used equally by similarly-
situated participants. Although the functionality of the Trade Now
instruction will differ depending upon the protocol that is used to
access the Exchange, the Exchange believes that the difference in
functionality reflects the different ways in which participants enter
and manage their order flow.
Midpoint Peg Post-Only Orders and Orders With Midpoint Pegging
For similar reasons, the Exchange does not believe that its
proposals to amend its rules regarding Midpoint Peg Post-Only Orders
and Orders with Midpoint Pegging will impose an undue burden on
competition. To the contrary, by clarifying the circumstances in which
such Orders will execute, cancel, or be removed and re-entered on the
Exchange Book when the NBBO (or Inside Bid and Inside Offer) becomes
crossed or when there is no NBBO (or Inside Bid and/or Inside Offer),
the Exchange will bolster its competitiveness vis-[agrave]-vis other
exchanges. Indeed, the proposed clarifications will help protect
Exchange participants from executing orders at sub-optimal prices while
also improving the efficiency of their order flow management processes.
Moreover, the proposals will render the Exchange's functionality for
these Orders similar to that of other exchanges, including Nasdaq.
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 \32\ and Rule 19b-
4(f)(6) thereunder.\33\
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\32\ 15 U.S.C. 78s(b)(3)(A).
\33\ 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-Phlx-2020-15 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-Phlx-2020-15. 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-Phlx-2020-15, and should be submitted on
or before May 4, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07653 Filed 4-10-20; 8:45 am]
BILLING CODE 8011-01-P