[Federal Register Volume 84, Number 200 (Wednesday, October 16, 2019)]
[Notices]
[Pages 55355-55362]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22482]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87262; File No. SR-NASDAQ-2019-082]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend The Nasdaq Options Market LLC Rules at Chapter VI and Chapter VII
October 9, 2019.
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 September 26, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II, below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend The Nasdaq Options Market LLC Rules
at Chapter VI, Section 5, ``Minimum Increments,'' Chapter VI, Section
6, ``Acceptance of Quotes and Orders,'' Chapter VI, Section 7, ``Entry
and Display Orders,'' Chapter VI, Section 10, ``Book Processing,''
Chapter VI, Section 21, ``Order and Quote Protocols,'' Chapter VII,
Section 5, ``Obligations of Market Makers,'' and Chapter VII, Section
12, ``Order Exposure Requirements.'' The Exchange proposes to relocate
certain current rules to new Rules Chapter VI, Section 22, titled
``Kill Switch'' and 23, titled ``Detection of Loss of Communication.''
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Chapter VI, Section 5, ``Minimum
Increments,'' Chapter VI, Section 6, ``Acceptance of Quotes and
Orders,'' Chapter VI, Section 7, ``Entry and Display Orders,'' Chapter
VI, Section 10, ``Book Processing,'' Chapter VI, Section 21, ``Order
and Quote Protocols,'' Chapter VII, Section 5, ``Obligations of Market
Makers,'' and Chapter VII, Section 12, ``Order Exposure Requirements.''
The Exchange proposes to relocate certain current rules to new Rules
Chapter VI, Section 22, titled ``Kill Switch'' and 23, titled
``Detection of Loss of Communication.'' Each rule change will be
discussed in greater detail below.
Chapter VI, Section 5 Minimum Increments
The Exchange proposes to amend Chapter VI, Section 5 to add a new
Section 5(c) which provides, ``A quote submitted to the System with an
invalid trading increment will be re-priced. The quote will be rounded
up to the nearest valid minimum price variation for offers and rounded
down for bids.'' Today, a quote submitted to NOM with an invalid
trading increment will be re-priced. The Exchange will round the price
up to the nearest valid minimum price variation for offers and will
round the price down for bids. The Exchange believes that providing
this transparency within the Exchange's rules will provide Market
Makers with greater information on the manner in which invalid
increments will be handled by the System and provide them with
expectations.
Chapter VI, Section 6 Acceptance of Quotes and Orders
Currently, Chapter VI, Section 6 is titled ``Acceptance of Quotes
and Orders.'' The Exchange proposes to retitle Chapter VI, Section 6 as
``Entry and Display of Quotes.'' The Exchange proposes to add an (a)
before the first paragraph. The Exchange is removing references to
orders in this Rule because it also proposes to adopt a new Chapter VI,
Section 7, titled ``Entry and Display of Orders'' to describe
requirements for order entry.
[[Page 55356]]
The Exchange proposes to add a new section (b) to Chapter VI,
Section 6 to describe the current requirements and conditions for
submitting quotes. These requirements reflect the current System
operation today. The Exchange proposes to memorialize the various
requirements for the submission of quotes into the System for greater
transparency. The Exchange proposes to provide at proposed Chapter VI,
Section 6(b), ``Quotes are subject to the following requirements and
conditions:''. The Exchange proposes to add at Chapter VI, Section
6(b)(1) that ``Market Makers may generate and submit option
quotations.'' Current Chapter VII, Section 6 makes clear that Market
Makers may submit quotes,\3\ however the Exchange proposes to create a
list of rules related to quote submission within this rule for ease of
reference. The Exchange proposes to provide at proposed Chapter VI,
Section 6(b)(2) that ``The System shall time-stamp a quote which shall
determine the time ranking of the quote for purposes of processing the
quote.'' The Exchange notes that all quotes today are time-stamped for
purposes of processing quotes. Proposed Rule Chapter VI, Section
6(b)(3) states that ``Market Makers may enter bids and/or offers in the
form of a two-sided quote. Only one quote may be submitted at a time
for an option series.'' The Exchange believes that this information
will provide Market Makers with information on submitting a quote. The
Exchange notes that bid or offer may be a ``0,'' however a price is
required to be entered for both the bid and offer to be entered into
the System. Further, the Exchange proposes at Chapter VI, Section
6(b)(4) to provide clarity for entering quotes and proposes to specify,
``The System accepts quotes beginning at a time specified by the
Exchange and communicated on the Exchange's website.'' \4\ The Exchange
believes that this information will bring greater transparency to the
Rulebook with respect to limitations for submitting quotations into the
System.
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\3\ Chapter VII, Section 6(b) provides, ``A Market Maker that
enters a bid (offer) in a series of an option in which he is
registered on NOM must enter an offer (bid).
\4\ The system settings page is located: http://www.nasdaqtrader.com/content/technicalsupport/NOMOptions_SystemSettings.pdf.
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The Exchange proposes a provision regarding firm quote within
proposed Rule Chapter VI, Section 6(b)(5):
Firm Quote. When quotes in options on another market or markets
are subject to relief from the firm quote requirement set forth in
the SEC Quote Rule, orders and quotes will receive an automatic
execution at or better than the NBBO based on the best bid or offer
in markets whose quotes are not subject to such relief. Such
determination may be made by way of notification from another market
that its quotes are not firm or are unreliable; administrative
message from the Option Price Reporting Authority (``OPRA''); quotes
received from another market designated as ``not firm'' using the
appropriate indicator; and/or telephonic or electronic inquiry to,
and verification from, another market that its quotes are not firm.
The Exchange shall maintain a record of each instance in which
another exchange's quotes are excluded from the Exchange's
calculation of NBBO, and shall notify such other exchange that its
quotes have been so excluded. Where quotes in options on another
market or markets previously subject to relief from the firm quote
requirement set forth in the Quote Rule are no longer subject to
such relief, such quotations will be included in the calculation of
NBBO for such options. Such determination may be made by way of
notification from another market that its quotes are firm;
administrative message from OPRA; and/or telephonic or electronic
inquiry to, and verification from, another market that its quotes
are firm.
NOM Chapter VII, Section 6(b)(5) describes Firm Quote for purposes
of quote submission. The Exchange proposes to memorialize within its
Rules the requirement for the dissemination of quotations pursuant to
Reg NMS.\5\ The Exchange is proposing to add the above rule text to
provide context as to this restriction for submitting quotes. The
Exchange proposes to make clear the manner in which quote relief will
occur. Specifically, this proposed rule text indicates the manner in
which a determination for quote relief is made. Further, the rule notes
the Exchange shall maintain a record of each instance in which another
exchange's quotes are excluded from the Exchange's calculation of NBBO,
and shall notify such other exchange that its quotes have been so
excluded. Also, when relief is no longer available, such quotations
will be included in the calculation of NBBO for such options. The
Exchange notes how the determination is made that relief is no longer
available. The proposed rule text adds greater context to the manner in
which Firm Quote relief is applied. This rule text represents the
current practice.
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\5\ 17 CFR 242.602.
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Similarly, the Exchange proposes to provide the following proposed
new Chapter VI, Section 6(b)(6):
Trade-Through Compliance and Locked or Crossed Markets. A quote
will not be executed at a price that trades through another market
or displayed at a price that would lock or cross another market. If,
at the time of entry, a quote would cause a locked or crossed market
violation or would cause a trade-through, violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the national best
price.
Today, quotations may not be executed against prices that trade-
through an away market as provided for in the Options Order Protection
and Locked/Crossed Market Plan which is also described within Chapter
XII, Options Order Protection and Locked and Crossed Market Rules.
Also, quotations may not lock or cross an away market. The repricing is
provided for today within NOM Chapter VI, Section 7(b)(3)(C).\6\ By
stating this limitation in the rule, Market Makers will have greater
clarity as to this limitation. Further, the Exchange is making clear
that a quote that would cause a locked or crossed market violation or
would cause a trade-through violation will be re-priced. The Exchange
would display the quote at one minimum price variation (``MPV'') above
(for offers) or below (for bids) the national best price. Repricing
quotes is consistent with the Act because the Exchange is not permitted
to lock or cross an away market's quote or order. The Exchange reprices
the quotes one MPV inferior to cause the displayed price to reflect the
available market on NOM.
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\6\ An order that is designated by a member as non-routable will
be re-priced in order to comply with applicable Trade-Through and
Locked and Crossed Markets restrictions.
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Finally, the Exchange proposes at Chapter VI, Section 6 (b)(7) to
provide, ``Quotes submitted to the System are subject to the following:
risk protections provided for in Chapter VI, Section 18. Quotes
submitted with minimum increments that are not valid pursuant to
Chapter VI, Section 5 will be rounded up to the nearest minimum price
variation for offers and rounded down to the nearest minimum price
variation for bids.'' The Exchange is noting herein the manner in which
a quote may be handled by the System to provide market participants
with expectations as to the interplay among the various NOM Rules.
Specifically, if the Market Maker does not submit a quotation compliant
with Chapter VI, Section 5, the quote will not be accepted by the
System because market participants are required to abide by Chapter VI,
Section 5 which describes the increments with which options series are
to be quoted. Chapter VI, Section 18 provides a list of all protections
applicable to quotes that may be rejected. The Exchange believes that
this rule will provide Options Participants with requirements and
[[Page 55357]]
conditions for submitting quotations and provide transparency as to
limitations that cause a quote to be rejected.
The Exchange proposes to provide at Chapter VI, Section 6(c),
``Quotes will be displayed in the System as described in Chapter VI,
Section 19.'' Chapter VI, Section 19, titled ``Data Fees and Trade
Information'' provides for the available feeds that Options
Participants may access on the Exchange. This list represents the
available data feeds and the content of those data feeds which are
offered today by NOM.
The amendment to NOM Chapter VI, Section 6 create a list of all the
requirements and conditions for submitting quotes on NOM within one
rule is consistent with the Act because it will provide greater
transparency to market participants of the applicable requirements.
Further, this proposal will make the current rule clear and
understandable for market participants thereby protecting investors and
the general public. The Exchange notes that while some of these
requirements appear in other rules, for ease of reference the
requirements are located within a single rule with this proposal. The
proposal reflects the Exchange's current practice with respect to
quoting requirements. This proposal will conform this Rule to other
Nasdaq affiliated markets filing similar rules.\7\ The Exchange's
proposal is intended to provide greater information with respect to
Firm Quote within new NOM Chapter VI, Section 6(b)(5) and regarding
trade-through and locked and crossed markets Section 6(b)(6). The
addition rule text is consistent with the Act because the Exchange is
adding detail regarding the method in which orders which are firm or
locked and crossed will be handled in the System. The notifications for
Firm Quote are made clear with the proposed rule text. The Exchange
believes that it is consistent with the Act to specify when quotes are
firm and the handling of such quotes by the System for the protection
of investors and the general public. The clarity is designed to promote
just and equitable principles of trade by notifying all participants
engaged in market making of potential outcomes. Today, quotations may
not be executed against at prices that trade-through an away market.
Also, quotations may not lock or cross an away market. The repricing of
quotations is consistent with the Act because repricing prevents the
Exchange from disseminating a price which locks or crosses another
market. NOM is required to avoid displaying a quotation that would lock
or cross a quotation of another market center at the time it is
displayed. Preventing inferior prices from displaying perfects the
mechanism of a free and open market and a national market system, and,
in general to protect investors and the public interest.
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\7\ Nasdaq Phlx, Nasdaq ISE, LLC, Nasdaq GEMX, LLC and Nasdaq
MRX, LLC have similar rules. See Securities Exchange Act Release
Nos. 86286 (July 2, 2019), 84 FR 32794 (July 9, 2019) (SR-Phlx-2019-
25) and SR-ISE-2019-23, SR-GEMX-2019-13 and SR-MRX-2019-20. The ISE,
GEMX and MRX rule changes are filed on September 17, 2019, but they
are not yet published [sic].
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The Exchange proposes to delete the rule text at Chapter VI,
Section 6(a)(1) and (2), which states:
(a) General--A System order is an order that is entered into the
System for display and/or execution as appropriate. Such orders are
executable against marketable contra-side orders in the System.
(1) All System Orders shall indicate whether they are a call or
put and buy or sell and a price, if any. Systems Orders can be
designated as Immediate or Cancel (``IOC''), Good-till-Cancelled
(``GTC''), Day (``DAY'') or WAIT.
(2) A System order may also be designated as a Limit Order, a
Minimum Quantity Order, a Market Order, a Price Improving Order, an
All-or-None Order, or a Post-Only Order.
The Exchange notes that all order types listed in Chapter VI,
Section 1(e) may be entered on NOM. All order types are executable
against marketable contra-side orders in the System. The System will
not permit an order to execute that is not marketable. NOM has
described in this proposal that it would not trade-through an away
market. All Time in Force designations noted in Chapter VI, Section
1(g) are available to market participants entering orders on NOM. The
Exchange believes that the information provided in Chapter VI, Section
6(a)(1) and (2) is also covered within Chapter VI, Section 1 and
therefore proposes to delete this rule text.
The Exchange proposes to relocate Chapter VI, Section 6(a)(3),
relating to zero-bid, and 6(b), relating to routing, into Chapter VI,
Section 10(5) and (6). The Exchange believes that this information
should be described within the rule describing allocation. Chapter VI,
Section 6(c), which is reserved, is being deleted. The Exchange
proposes to relocate Chapter VI, Section 6(d), related to the NOM
Options Kill Switch, to new Chapter VI, Section 22. The Exchange
proposes to relocate Chapter VI, Section 6(e), related to Detection of
Loss of Communication, to new Chapter VI, Section 23. The Exchange
believes that these two topics should be in separate rules for ease of
locating those rules. The Exchange is not proposing to amend the Kill
Switch or Detection of Loss of Communication rules; this rule change is
non-substantive. The Exchange proposes to update internal cross-
references.
Chapter VI, Section 7, Entry and Display Orders
The Exchange proposes to amend Chapter VI, Section 7 titled ``Entry
and Display Orders.'' The Exchange proposes to retitle this rule,
``Entry and Display of Orders.'' Similar to Chapter VI, Section 6 for
quotes, the Exchange proposes this new rule to describe the current
requirements and conditions for entering orders. The Exchange notes
that the requirements provided for within this rule represent the
current practice. The purpose of Chapter VI, Section 7 is to
memorialize this information within a single rule.
The Exchange proposes to amend Chapter VI, Section 7(a) to remove
the title, ``Entry of Orders- ''. The Exchange's new rule text at
Chapter VI, Section 7(a) proposes to make clear that multiple orders
may be transmitted to the System at single or multiple price levels.
This is the case today. The Exchange proposes to memorialize the manner
in which orders may be submitted to the System to add more detail to
its rules. The Exchange proposes to amend Chapter VI, Section 7(a)(1)
to remove the sentence, ``Each order shall indicate the amount of
Reserve Size (if applicable).'' No order type on NOM has a Reserve
Size.\8\ The Exchange proposes to adopt a new Chapter VI, Section
7(a)(2) which provides, ``The System accepts orders beginning at a time
specified by the Exchange and communicated on the Exchange's website.''
\9\ The Exchange proposes to renumber Chapter VI, Section 7(a)(2) as
(a)(3). The Exchange proposes to renumber Chapter VI, Section 7(a)(3)
as (a)(4) and amend the rule which provides, ``Orders can be entered
into the System (or previously entered orders cancelled) from the time
prior to market open specified by the Exchange on its website until
market close'' to ``Orders submitted to the System are subject to
minimum increments provided for in Chapter VI, Section 5, risk
protections within Chapter VI, Section 18 and the restrictions of order
types within Chapter VI, Section 21(b). The Exchange is proposing to
conform order entry
[[Page 55358]]
rules across its Nasdaq Affiliated markets, where applicable. The
Exchange proposed the time during which the System accepts orders
within Chapter VI, Section 7(a)(2). All orders must adhere to other
rule requirements such as minimum increments, risk protection rules and
order types. Similar to the rule text for quotes, orders are currently
subject the minimum increment requirements in Chapter VI, Section 5,
the risk protections for orders which are listed within current Chapter
VI, Section 18 as well as the restrictions of order types within
Chapter VI, Section 21(b). This rule provides a list of other
requirements which may impact the execution of an order. Finally,
orders may execute at multiple prices. This rule provides a list of
other requirements which may impact the execution of an order.
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\8\ NOM no longer has any order types with non-displayed
interest; previously, NOM offered Discretionary Orders and Reserve
Orders on NOM, but both have been eliminated. See Securities
Exchange Act Release No. 65873 (December 2, 2011), 76 FR 76786
(December 8, 2011) (SR-NASDAQ-2011-164).
\9\ See note 4 above.
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The Exchange proposes to add new rule at Chapter VI, Section
7(a)(5) which states, ``Nullification by Mutual Agreement. Trades may
be nullified if all parties participating in the trade agree to the
nullification. In such case, one party must notify the Exchange and the
Exchange promptly will disseminate the nullification to OPRA. It is
considered conduct inconsistent with just and equitable principles of
trade for a party to use the mutual adjustment process to circumvent
any applicable Exchange rule, the Act or any of the rules and
regulations thereunder.'' The rule text of new Chapter VI, Section
7(a)(5) is similar to Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC
(``GEMX'') and Nasdaq MRX, LLC (``MRX'') Options 3, Section 4(b).
Trades may be nullified today by agreement of the parties. The Exchange
believes that it is consistent with the Act to permit parties to agree
to a nullification provided the nullification does not violate other
exchange rules. The Exchange notes that parties may not agree to a
mutual agreement for purposes that would cause another rule to be
violated. The Exchange believes that it is consistent with the Act and
protection of investors and general public to make clear the expected
behavior with respect to nullifications.
The Exchange proposes to adopt new rule text at Chapter VI, Section
7(b) is similar to rule text at to ISE, GEMX and MRX Options 3, Section
15(a). This proposed rule provides,
NBBO Price Protection. Orders, other than Intermarket Sweep
Orders (as defined in Rule Chapter XII, Section 1(9)) will not be
automatically executed by the System at prices inferior to the NBBO
(as defined in Chapter XII, Section 1(11)). There is no NBBO price
protection with respect to any other market whose quotations are
Non-Firm (as defined in Chapter XII, Section 1(12)).
The Exchange believes that although NOM Rules \10\ make clear that
orders may not execute at prices inferior to the NBBO, this rule text
will provide that limitation in this proposed list of limitations for
ease of reference. The Exchange notes that this NBBO Protection applies
to orders and therefore is being discussed within proposed Chapter VI,
Section 7 which applies to all Options Participants. In contrast,
Chapter VI, Section 6, which applies to quotes entered by Market
Makers, describes the Firm Quote protections and the interplay of NBBO
with respect to quotes. Trade-Through is described in both Chapter VI,
Section 6 and 7.
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\10\ Intermarket Sweep Orders (as defined in Rule Chapter XII,
Section 1(9)) will not be automatically executed by the System at
prices inferior to the NBBO (as defined in Chapter XII, Section
1(11)).
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The Exchange proposes to state at Chapter VI, Section 7(c), ``The
System automatically executes eligible orders using the Exchange's
displayed best bid and offer (``BBO'') or the Exchange's non-displayed
order book (``internal BBO''). The contract size associated with
Displayed Price Improving Orders to buy (sell) are displayed at the MPV
below (above) the price of the Price Improving Order. Price Improving
Orders will not be permitted to create a locked or crossed market or to
cause a trade through violation.'' This rule seeks to define the
Exchange's best bid and offer as the ``BBO'' and distinguish the
displayed book from the non-displayed book for reference. The Exchange
provides that the System automatically executes eligible orders using
the Exchange's displayed best bid and offer (``BBO''). NOM also permits
members to enter non-displayed orders such as Price Improving
Orders.\11\ The non-displayed orders are available on the Exchange's
order book (``internal BBO''). NOM also reprices orders to avoid
locking or crossing another market as explained below. Therefore, on
NOM, eligible orders will execute at the best price available, the BBO
or the internal BBO. The Exchange believes that this information will
provide Options Participants with additional information to how the
Exchange describes its displayed and non-displayed orders. Further the
proposal to add information related to NBBO Protection and define the
Exchange's best bid and offer as the ``BBO'' and distinguish the
displayed book from the non-displayed book for reference will bring
greater transparency and clarity to the Exchange's rules. The Exchange
disseminates its BBO which does not contain non-displayed information.
The Exchange believes that describing the ``internal BBO'' will bring
greater transparency to the rule as the Order Book may contain non-
displayed orders which may offer better prices than the BBO. The
Exchange believes describing the displayed and non-displayed order book
will inform members as to availability of orders on the Order Book and
protect investors and the general public by providing additional
information about non-displayed order types.
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\11\ NOM Rules at Chapter VI, Section 1(e)(6) states, ``Price
Improving Orders'' are orders to buy or sell an option at a
specified price at an increment smaller than the minimum price
variation in the security. Price Improving Orders may be entered in
increments as small as one cent. Price Improving Orders that are
available for display shall be displayed at the minimum price
variation in that security and shall be rounded up for sell orders
and rounded down for buy orders.''
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The Exchange proposes to relocate current NOM Chapter VI, Section
7(b)(3)(B) \12\ into Chapter VI, Section 7(c).
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\12\ NOM Chapter VI, Section 7(b)(3)(B) provides, ``The contract
size associated with Displayed Price Improving Orders to buy (sell)
are displayed at the MPV below (above) the price of the Price
Improving Order. Price Improving Orders will not be permitted to
create a locked or crossed market or to cause a trade through
violation.''
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The Exchange proposes to provide rule text at Chapter VI, Section
7(e), similar to Chapter VI, Section 6(c) which states, ``Orders will
be displayed in the System as described in Chapter VI, Section 19.''
The Exchange proposes to delete current Chapter VI, Section
7(b)(1)-(3) which provides,
Display of Orders--The System will display orders submitted to
the System as follows:
(1) System Book Feed--displayed orders resident in the System
available for execution will be displayed via the System Book Feed.
(2) Best Priced Order Display--For each System Security, the
aggregate size of all Orders at the best price to buy and sell
resident in the System will be transmitted for display to the
appropriate network processor.
(3) Exceptions--The following exceptions shall apply to the
display parameters set forth in paragraphs (1) and (2) above:
The display of orders as well as the text relating to System Book
Feed are being deleted because the data feeds are described in other
rules.\13\ The Exchange believes this information is unnecessary as the
data feeds are specific as to the content of the displayed information.
The Exchange is also proposing to remove the rule text related to Best
Priced Order Display as this information is described within Chapter
XII, Options Order Protection
[[Page 55359]]
and Locked and Crossed Markets. Specifically, NOM Chapter XII, Section
1(18) which describes a Protected Bid and Offer and the manner in which
they are disseminated to the OPRA Plan. The Exchange proposes to delete
Chapter VI, Section 7(b)(3) as well as subsections (A) which is
reserved. Current NOM Chapter VI, Section 7(b)(3) notes exceptions to
the display parameters. As noted (A) is reserved and as mentioned
herein (B) and (C) are relocated within Section 7.
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\13\ See NOM Chapter VI, Section 19, ``Data Feeds and Trade
Information.''
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The Exchange's proposal to adopt a new Chapter VI, Section 7,
``Entry and Display of Orders'' and describe the current requirements
and conditions for entering orders, similar to proposed changes to
Chapter VI, Section 6 for quotes is consistent with the Act because it
will provide transparency as to manner in which orders may be submitted
to the System. The Exchange's new rule reflects the current
requirements for submitting orders into the System. Similar to proposed
Chapter VI, Section 6, the Exchange proposes to memorialize
requirements and limitations within one rule for ease of reference.
Chapter VI, Section 10, Book Processing
As noted above, the Exchange is relocating rule text from current
Chapter VI, Section 6(a)(3) and 6(b) to Chapter VI, Section 10(5) and
(6). The Exchange also proposes to renumber current Chapter VI, Section
10(5) as ``(7)''.
Chapter VI, Section 21, Order and Quote Protocols
The Exchange proposes to amend Chapter VI, Section 21(a)(i)(B) to
add the following sentence to Specialized Quote Feed (``SQF''),
``Market Makers may only enter interest into SQF in their assigned
options series.'' The Exchange notes that today Market Makers may
utilize SQF to quote only in their assigned options series.\14\ The
Exchange proposes a similar change to QUO, a Market Maker quoting
protocol, within Chapter VI, Section 21(a)(i)(D). This proposed rule
text is consistent with the Act because it will add greater clarity to
the current rule for the protection of investors and the public
interest.
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\14\ See NOM Chapter VII, Section 2.
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Chapter VII, Section 5, Obligations of Market Makers
The Exchange proposes to add a new Chapter VII, Section 5(d) to
describe the manner in which Market Makers may enter orders on NOM.
There is no rule currently describing order entry by Market Makers. The
Exchange proposes to memorialize the current practice by providing
``Market Makers may enter all order types defined in Chapter VI,
Section 1(e) in the options classes to which they are appointed and
non-appointed.'' This rule will provide Market Makers with information
as to the types of orders that may entered on NOM.
Chapter VII, Section 12, Order Exposure Requirements
The Exchange proposes to amend current Chapter VII, Section 12,
titled ``Order Exposure Requirements.'' The Exchange proposes to amend
the title to ``Limitations on Order Entry'' to conform the rule to
other Nasdaq affiliate market rules.\15\
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\15\ See note 7 above.
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The Exchange proposes to add a title to Section 12(a) which states
``Limitations on Principal Transactions.'' The Exchange also proposes
to relocate Commentary .03 to the end of Section 12.
The Exchange proposes to relocate Commentary .01 to new Section
12(a)(1) and replace the reference to Section 12 with ``This Rule.''
The Exchange proposes to add a new Chapter VII, Section 12(b)
similar to Phlx Rule 1097(b) as follows:
Limit Orders. Options Participants shall not enter Public
Customer limit orders into the System in the same options series,
for the account or accounts of the same or related beneficial
owners, in such a manner that the beneficial owner(s) effectively is
operating as a market maker by holding itself out as willing to buy
and sell such options contract on a regular or continuous basis. In
determining whether a beneficial owner effectively is operating as a
market maker, the Exchange will consider, among other things: the
simultaneous or near-simultaneous entry of limit orders to buy and
sell the same options contract and the entry of multiple limit
orders at different prices in the same options series.
This Rule prohibits Public Customers from entering limit orders
into the Order Book in the same option series in a manner where the
public customer is effectively operating as a market maker by holding
itself out as willing to buy and sell such options contract on a
regular or continuous basis. This rule would limit the ability of
Options Participants that are not Market Makers to compete on
preferential terms, including Public Customers who are provided with
certain benefits, such as priority of bids and offers. Restrictions on
the entry of Professional or broker-dealer orders are not imposed
because the same priority does not exist. As noted herein, Market
Makers are required to register with the Exchange.\16\ Market Makers
are afforded preferential pricing.\17\ The Exchange believes that
Public Customers that desire to make markets on NOM should register
with the Exchange. The Exchange's proposal to adopt this new rule text
within Chapter VII, Section 12(b) will bring greater clarity to current
limitations that exist when entering orders. Section 12 is consistent
with the Act and will promote just and equitable principles of trade
and remove impediments to and perfect the mechanism of a free and open
market and a national market system because it will continue to make
clear the requirement to expose orders as well as present more specific
limitations on order entry which would violate NOM Rules. Providing
members with more information as to the type of behavior that is
violative with respect to order exposure will prevent inadvertent
violations of Exchange rules and ensure that orders are subject to
appropriate price discovery.
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\16\ See NOM Chapter VII, Section 2.
\17\ See NOM's Pricing Schedule at Options 7
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The Exchange proposes to relocate Commentary .02 to Chapter VII,
Section 12 to Section 12(c). The Exchange proposes to title this
section as ``Limitations on Solicitation Orders'' and amend the text to
conform to ISE, GEMX and MRX Options 3, Section 22. The amendments to
the rule text is not substantive and simply reiterates the same
exception in conformance with the language of other Nasdaq affiliated
exchanges.
Finally, the Exchange proposes to relocate Commentary .04 to
Chapter VII, Section 12(d) and the phrase ``for purposes of violating
Chapter VII, Section 12'' at the end of the rule text. This phrase will
make clear that the violation is specific to this rule
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\18\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\19\ 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 as provided for within the purpose section.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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Chapter VI, Section 5 Minimum Increments
The Exchange's proposal to amend Chapter VI, Section 5 to add a new
Section 5(c) which describes how a quote submitted to NOM with an
[[Page 55360]]
invalid trading increment will be re-priced is consistent with the Act
because the Exchange re-prices quotes with invalid increments instead
of rejecting those quotes. A Market Maker submitting a quote with an
invalid increment would experience latency if the quote was rejected
instead of re-priced. The Exchange believes re-pricing is consistent
with the Act and protection of investors and the public interest
because it will permit Market Makers, who are professional traders, to
avoid a delay in re-entering quotes. Market Makers today have their
quotes re-priced and have not expressed any concern with this process.
By memorializing this repricing within NOM's Rules will bring
transparency as to the manner in which invalid increments will be
handled by the System.
Chapter VI, Section 6 Acceptance of Quotes and Orders
The Exchange's proposal to add a new section (b) to Chapter VI,
Section 6 to describe the current requirements and conditions for
submitting quotes is consistent with the Act. The Exchange proposes
within Chapter VI, Section 6 to create a list of all the requirements
and conditions for submitting quotes on NOM within one rule is
consistent with the Act because it will provide greater transparency to
market participants of the applicable requirements. The Exchange's
proposal is intended to provide greater information with respect to
Firm Quote within new Section 6(b)(5) and regarding trade-through and
locked and crossed markets Section 6(b)(6).
The additional rule text is consistent with the Act because it adds
detail regarding the method in which orders which are firm or locked
and crossed will be handled in the System. The notifications for Firm
Quote are made clear with the proposed rule text. The Exchange believes
that it is consistent with the Act to specify when quotes are firm and
the handling of such quotes by the System for the protection of
investors and the general public. The clarity is designed to promote
just and equitable principles of trade by notifying all participants
engaged in market making of potential outcomes. Today, quotations may
not be executed against at prices that trade-through an away market.
Also, quotations may not lock or cross an away market. The repricing of
quotations is consistent with the Act because repricing prevents the
Exchange from disseminating a price which locks or crosses another
market. NOM is required to avoid displaying a quotation that would lock
or cross a quotation of another market center at the time it is
displayed. Preventing inferior prices from displaying perfects the
mechanism of a free and open market and a national market system, and,
in general protects investors and the public interest.
NOM is memorializing its current practice by reflecting the various
requirements and limitations for quote entry in one rule for ease of
reference and clarity. The Exchange proposes to conform this rule to
similar rules across other Nasdaq affiliated exchanges.\20\ Making
clear the manner in which Market Makers may generate and submit option
quotations will provide these market participants with clear guidance
within the rules. Chapter VII, Section 6(b)(1) makes clear that Market
Makers may submit quotes.\21\ Further, Chapter VI, Section 21 describes
the SQF and QUO interfaces.\22\ NOM proposes to clarify that only one
quote may be submitted at a time for a series. The Exchange believes
that memorializing these restrictions will bring greater clarity to the
Exchange's rules.
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\20\ See note 7 above.
\21\ Chapter VII, Section 2 describes the manner in which Market
Makers must register and Section 6(c) provides for firm quote.
\22\ Chapter VI, Section 21(a)(i)(B) provides, ``Specialized
Quote Feed'' or ``SQF'' is an interface that allows Market Makers to
connect, send, and receive messages related to quotes and Immediate-
or-Cancel Orders into and from the Exchange. Features include the
following: (1) Options symbol directory messages (e.g underlying
instruments); (2) system event messages (e.g., start of trading
hours messages and start of opening); (3) trading action messages
(e.g., halts and resumes); (4) execution messages; (5) quote
messages; (6) Immediate-or-Cancel Order messages; (7) risk
protection triggers and purge notifications; and (8) opening
imbalance messages. The SQF Purge Interface only receives and
notifies of purge request from the Market Maker. Chapter VI, Section
21(a)(i)(D) provides ``Quote Using Orders'' or ``QUO'' is an
interface that allows NOM Market Makers to connect, send, and
receive messages related to single-sided orders to and from the
Exchange. Order Features include the following: (1) Options symbol
directory messages (e.g., underlying); (2) system event messages
(e.g., start of trading hours messages and start of opening); (3)
trading action messages (e.g., halts and resumes); (4) execution
messages; (5) order messages; and (6) risk protection triggers and
cancel notifications. Orders submitted by NOM Market Makers over
this interface are treated as quotes.
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The relocations of both the Kill Switch and Detection of Loss of
Communication rules is consistent with the Act because these
relocations will bring greater transparency to these protection rules
because they will be easier to search by the title within the Rulebook.
The relocation of the zero-bid and routing information to Chapter VI,
Section 10(5) and (6) is intended to locate that information with rules
describing allocation.
The Exchange's proposal to eliminate rule text within current
Chapter VI, Section 6(a)(1) and (2) is consistent with the Act because
these rules describe order types in general. The order types are
described today within Chapter VI, Section 1(e). All order types are
executable against marketable contra-side orders in the System. All
Time in Force designations noted in Chapter VI, Section 1(g) are
available to market participants entering orders on NOM. The Exchange
believes that the information provided in Chapter VI, Section 6(a)(1)
and (2) is covered within Chapter VI, Section 1. The Exchange believes
that eliminating this rule is consistent with the Act because the rule
text does not add any new information.
Chapter VI, Section 7, Entry and Display Orders
Similar to Chapter VI, Section 6, which describes requirements for
quotes, the Exchange proposes to adopt a new Chapter VI, Section 7,
``Entry and Display of Orders'' and describe the current requirements
and conditions for entering orders. The Exchange notes that the
requirements provided for within this rule represent the current
practice. The purpose of Chapter VI, Section 7 is to memorialize this
information within a single rule to provide a list of other
requirements which may impact the execution of an order. Trades may be
nullified today by agreement of the parties. The Exchange believes that
it is consistent with the Act to permit parties to agree to a
nullification provided the nullification does not violate other
exchange rules. The Exchange notes that parties may not agree to a
mutual agreement for purposes that would cause another rule to be
violated. The Exchange believes that it is consistent with the Act and
protection of investors and general public to make clear the expected
behavior with respect to nullifications.
Today, orders may not be executed at a price that trades through an
away market. Also, orders may not lock or cross an away market.
Routable orders must comply with Trade-Through and Locked and Crossed
Markets restrictions. The repricing of orders is consistent with the
Act because repricing prevents the Exchange from disseminating a price
which locks or crosses another market. NOM is required avoiding
displaying an order that would lock or cross a quotation of another
market center at the time it is displayed. Preventing inferior prices
from displaying perfects the mechanism of a free and open market and a
national market system, and, in general to protect investors and the
public interest. The Exchange's proposal to adopt a new Chapter VI,
Section 7, ``Entry and
[[Page 55361]]
Display of Orders'' and describe the current requirements and
conditions for entering orders, similar to proposed changes to Chapter
VI, Section 6 for quotes is consistent with the Act because it will
provide transparency as to manner in which orders may be submitted to
the System. The Exchange's new rule reflects the current requirements
for submitting orders into the System. Similar to proposed Chapter VI,
Section 6, the Exchange proposes to memorialize requirements and
limitations within one rule for ease of reference.
The Exchange's proposal to adopt a new Chapter VI, Section 7 will
conform proposed Rule to other Nasdaq affiliated markets filing similar
rules.\23\ The Exchange's proposal to add rule text to describe
potential violations of this rule will bring greater clarity to current
limitations that exist when entering orders. Proposed Chapter VI,
Section 7 is consistent with the Act because it provides one rule for
ease of reference which lists the current limitations and some
additional limitations. The Exchange believes the proposed rule will
promote just and equitable principles of trade and remove impediments
to and perfect the mechanism of a free and open market and a national
market system because it will continue to make clear the requirement to
expose orders as well as present more specific limitations on order
entry which would violate NOM Rules. Providing members with more
information as to the type of behavior that is violative with respect
to order exposure will prevent inadvertent violations of Exchange rules
and ensure that orders are subject to appropriate price discovery.
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\23\ See note 7 above.
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Chapter VI, Section 21, Order and Quote Protocols
The Exchange's proposal to amend Chapter VI, Section 21(a)(i)(B)
and (D) to make clear that Market Makers may only enter interest into
SQF/QUO in their assigned options series is consistent with the Act.
Chapter VII, Section 2, Market Maker Registration, describes the manner
in which Market Makers are appointed in options series. This sentence
simply provides that SQF/QUO may only be utilized for quoting in
assigned options series.
Chapter VII, Section 5, Obligations of Market Makers
Memorializing information related to order entry for Market Makers
within Chapter VII, Section 5 will bring greater clarity to the
Rulebook. Today, Market Makers may enter all order types defined in
Chapter VI, Section 1(e).
Chapter VII, Section 12, Order Exposure Requirements
The Exchange's proposal to amend Chapter VII, Section 12 to provide
specific rules for limitations on entering limit orders, principal
transactions and agency orders is consistent with the Act. Providing
market participants with clear guidelines will protect investors and
the public interest by providing additional notice of violative
behavior when entering orders. The proposed rule text is similar to
current Nasdaq Phlx LLC Rules.\24\ The Exchange believes that this
proposed language will provide more transparency as to the types of
transactions that are not permitted today on NOM and would violate NOM
Chapter III, Section 4(f). With respect to limit orders, the Exchange
seeks to limit the ability of non-market makers to effectively make
markets on the Exchange using automated systems that place and cancel
orders in a manner that is similar to quoting. With respect to
principal transactions, the Exchange is making clear that a NOM Options
Participant may not take both sides of a trade (the agency side and
also act as principal) on an execution without order exposure to
provide the agency order the opportunity for price improvement. This
rule is intended to ensure that customers receive fair executions. This
rule is consistent with the Act in that it promotes just and equitable
principles of trade and protects investors and the public interest. The
Exchange's proposal to describe exposure of agency orders mirrors
language already contained with Chapter VI, Section 12. The Exchange
also notes that current Chapter III, Section 4(f) would apply to the
types of violations noted with respect to new Chapter VII, Section 12
provisions.
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\24\ See Nasdaq Phlx LLC Rule 1080(c)(ii)(C)(1) and (2) and
1080(j).
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The Exchange's proposal to add additional rule text to proposed new
Chapter VII, Section 12(d) will make clear that a Options Participant
cannot inform another Options Participant or any other third party of
any of the terms of the order in violation of Chapter VII, Section 12
will bring greater transparency to the Exchange's Rule.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange notes that
other options markets have similar rules with respect to order and
quote entry and the requirements to expose orders. The implementation
of such rules may vary across options markets. Despite the variation in
implementation, the Exchange does not believe this proposal creates an
undue burden on inter-market competition because the requirements for
order exposure are consistent with respect to all markets as well as
the ability to submit quotes and orders on all options markets.
Chapter VI, Section 5 Minimum Increments
The Exchange's proposal to amend Chapter VI, Section 5 to add a new
Section 5(c) which describes how a quote submitted to NOM with an
invalid trading increment will be re-priced does not impose an undue
burden on competition because this re-pricing applies uniformly to all
Market Makers. The Exchange believes that providing this transparency
within the Exchange's rules will provide market participants with
greater information on the manner in which invalid increments will be
handled by the System.
Chapter VI, Section 6 Acceptance of Quotes and Orders
The Exchange's proposal to describe the current requirements and
conditions for submitting quotes does not impose an undue burden on
competition and all Market Makers are subject to these requirements
today. The Exchange is memorializing its current practice by reflecting
the various requirements and limitations for quote entry in one rule
for ease of reference and clarity. The Exchange is also proposing to
conform this rule to similar rules across other Nasdaq affiliated
exchanges.
Chapter VI, Section 7, Entry and Display Orders
The Exchange's proposal to amend Chapter VI, Section 7, ``Entry and
Display Orders'' to describe the current requirements and conditions
for entering orders, similar to proposed changes to Chapter VI, Section
6 for quotes does not create an undue burden on competition because it
will apply uniformly to all market participants. The Exchange is
memorializing its current practice by reflecting the various
requirements and limitations for order entry in one rule for ease of
reference and clarity. The Exchange is also proposing to conform this
rule to similar rules across other Nasdaq affiliated exchanges. Making
clear the manner in which Options Participants may generate and submit
option orders will
[[Page 55362]]
provide these market participants with clear guidance within the rules.
Chapter VI, Section 21, Order and Quote Protocols
The Exchange proposes to amend Chapter VI, Section 21(a)(i)(B) and
(C) to make clear that Market Makers may only enter interest into SQF/
QUO in their assigned options series does not impose an undue burden on
competition, rather it makes clear that SQF/QUO may only be utilized
for quoting in assigned options series. This rule is applicable to all
Market Makers.
Chapter VII, Section 5, Obligations of Market Makers
Memorializing information related to order entry for Market Makers
within Chapter VII, Section 5 does not impose an undue burden on
competition. Today, Market Makers may enter all order types defined in
Chapter VI, Section 1(e).
Chapter VII, Section 12, Order Exposure Requirements
The Exchange's proposal to amend Chapter VII, Section 12 to provide
specific rules for limitations on entering limit orders, principal
transactions and agency orders does not impose an undue burden on
competition because these rules provide additional specificity as to
the manner in which orders may be entered on NOM. The Exchange believes
that this proposed language will provide more transparency as to the
types of transactions that are not permitted today on NOM and would
violate NOM Chapter III, Section 4(f). These rules will apply uniformly
to all NOM Options Participants.
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)(iii) of the Act \25\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\26\
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\25\ 15 U.S.C. 78s(b)(3)(A)(iii).
\26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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 should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2019-082 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-2019-082. 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-2019-082 and should be submitted
on or before November 6, 2019.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22482 Filed 10-15-19; 8:45 am]
BILLING CODE 8011-01-P