[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Notices]
[Pages 44333-44337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15792]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89334; File No. SR-NASDAQ-2020-037]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt a New ``Early Market
On Close'' Order Type
July 16, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\
[[Page 44334]]
notice is hereby given that on July 6, 2020, The Nasdaq Stock Market
LLC (``Nasdaq'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``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 adopt the ``Early Market On Close'' as a
new order type. The Exchange also proposes to amend Rule 4754 and make
conforming changes to Rules 4703 and 4756.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 4702 to adopt a new Order Type,
entitled the ``Early Market on Close'' or ``EMOC'' Order Type.
Generally speaking, the Exchange intends for the EMOC to be an
additional offering to its Market On Close (``MOC'') Orders, as well as
a competitive alternative to the newly-approved Cboe BZX Market-On-
Close order type (the ``Cboe Market Close'' or ``CMC'').\3\ That is,
EMOC would enable market participants that wish to buy or sell Nasdaq-
listed securities as part of the Nasdaq closing auction (the ``Nasdaq
Closing Cross''), and to obtain matched executions at the Nasdaq
Closing Cross price, the ability to do so at a time that is earlier
than what is possible with ordinary MOC Orders.\4\
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\3\ See Securities Exchange Act Release No. 34-88008 (January
21, 2020), 85 FR 4726 (January 27, 2020) (SR-BatsBZX-2017-34) (the
``BZX Approval Order'').
\4\ Pursuant to Rule 4702(b)(11), a MOC is an Order Type entered
without a price that may be executed only during the Nasdaq Closing
Cross. MOC Orders may be entered between 4 a.m. ET and immediately
prior to 3:55 p.m. ET. MOC Orders may be cancelled and/or modified
between 4 a.m. ET and immediately prior to 3:50 p.m. ET. Between
3:50 p.m. ET and immediately prior to 3:58 p.m. ET, an MOC Order can
be cancelled and/or modified only if the Participant requests that
Nasdaq correct a legitimate error in the Order (e.g., Side, Size,
Symbol, or Price, or duplication of an Order). MOC Orders cannot be
cancelled or modified at or after 3:58 p.m. ET for any reason. An
MOC Order shall execute only at the price determined by the Nasdaq
Closing Cross.
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Specifically, an EMOC Order would be an unpriced Order to buy or
sell a Nasdaq-listed security that the Exchange would seek to match
with other like orders at 3:35 p.m. Eastern Time (``ET''). If so
matched, the Exchange would execute the Order as part of the Nasdaq
Closing Cross.
If no such match occurs, the Exchange would automatically convert
any unmatched shares of EMOC Orders into a regular MOC Order for
participation in the Nasdaq Closing Cross, while retaining their
original time priority. Once converted, unmatched shares of EMOC Orders
would thereafter be handled in the same manner as an ordinary MOC
Order. Notably, a participant would be able to cancel or modify a
converted EMOC Order for any reason after 3:35 and before 3:50 p.m. ET,
just as it would for a MOC Order, and the participant could cancel or
modify the converted EMOC Order between 3:50 and prior to 3:58 p.m. ET
to correct a legitimate error in the Order, again, just as it could
with a MOC Order. Converted shares of EMOC Orders would execute in the
Nasdaq Closing Cross in the same manner and with the same priority as
does a MOC Order and it would be subject to the same auxiliary, LULD
Closing Cross, and contingency procedures as are MOC Orders. Like MOC
Orders, converted shares of EMOC Orders that remain unexecuted after
the Closing Cross will be canceled.
The Exchange proposes to allow its members to enter, cancel, or
modify EMOC Orders beginning at 9:30 a.m. ET \5\ and until immediately
prior to 3:35 p.m. ET (or 25 minutes prior to the early closing time on
a day when Nasdaq closes early). Exchange members would not be able to
enter, cancel, or modify EMOC Orders at or after 3:35 p.m. (or at or
after 25 minutes prior to the early closing time on a day when Nasdaq
closes early).\6\
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\5\ Nasdaq believes that accepting EMOC orders beginning at 9:30
a.m., is appropriate because it observes that this is approximately
the time that its members typically begin to enter regular Market on
Close Orders.
\6\ The QIX order entry protocol would not be available for the
entry of an EMOC because it is used primarily for quoting purposes.
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Pursuant to proposed Rule 4702(b)(16)(B), a Participant would be
able to designate the Time-in-Force for an EMOC Order either by
designating a Time-in-Force of ``On Close'' or by entering a Time-in-
Force of IOC and flagging the Order to participate in the Nasdaq
Closing Cross.
When entering short sale EMOC Orders, Exchange members would be
required to mark them as ``short'' or ``short exempt'' pursuant to Rule
4702(a). The Exchange's System would reject EMOC Orders marked
``short,'' while it would accept and process EMOC Orders marked ``short
exempt'' in accordance with Rule 4763. This will ensure that the
Exchange is able to comply with its obligations under Rule 201 of
Regulation SHO in the event that a short sale circuit breaker is
triggered and the Nasdaq Closing Cross price is not above the national
best bid.\7\
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\7\ See BZX Approval Order, supra, 85 FR at 4752.
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At 3:35 p.m. ET (or 25 minutes prior to the early closing time on a
day when Nasdaq closes early), the System would match for execution all
buy and sell EMOC Orders entered into the System with execution
priority determined based on time-received.
The Exchange would communicate information about the size of
matched EMOC Orders as part of its Early Order Imbalance Indicator
(``EOII'') and Order Imbalance Indicator (``NOII'').\8\
[[Page 44335]]
However, the Exchange would not discretely disclose the number of
matched EMOC shares in the EOII and NOII. Instead, the Exchange would
fold this information into its disclosure of the aggregate number of
shares that have been paired at the then Current Reference Price.\9\ In
other words, the EOII and NOII would provide an aggregate disclosure of
the numbers of paired shares that represent EMOC, regular MOCs, Limit
on Close, and Imbalance Only Orders. The disclosure would not specify
the particular Order Types that the paired shares represent.\10\
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\8\ The NOII is a message that the Exchange disseminates by
electronic means, beginning at 3:55 p.m. ET (or 5 minutes prior to
the early closing time on a day when Nasdaq closes early), and which
contains information about MOC, LOC, IO, and Close Eligible Interest
and the price at which those orders would execute at the time of
dissemination. See Rule 4754(a)(7). The information that the NOII
disseminates includes: (i) The ``Current Reference Price''
(discussed below); (ii) the number of shares represented by MOC,
LOC, and IO orders that are paired at the Current Reference Price;
(iii) the size of any ``Imbalance'' (i.e., the number of shares of
buy or sell MOC or LOC orders that cannot be matched with other MOC,
LOC, or IO order shares at a particular price at any given time);
(iv) the buy/sell direction of any Imbalance; and (v) indicative
prices at which the Nasdaq Closing Cross would occur if the Nasdaq
Closing Cross were to occur at that time and the percent by which
the indicative prices are outside the then current Nasdaq Market
Center best bid or best offer, whichever is closer. See id.
The EOII is an earlier message that the Exchange disseminates
by electronic means, beginning at 3:50 p.m. ET (or 10 minutes prior
to the early closing time on a day when Nasdaq closes early), and
which contains all of the same categories of information as does the
NOII, except that it excludes indicative pricing information. See
Rule 4754(a)(10).
The Exchange proposes to amend the definitions of the terms
NOII and EOII so that the Rules state that they will include
information about EMOC Orders and the price at which those Orders
would execute at the time of dissemination.
Nasdaq also proposes to amend the definition of ``Imbalance''
to include the number of shares of buy or sell EMOC Orders that
cannot be matched with other EMOC Order shares at a particular price
at any given time. Nasdaq notes that this definitional change will
have no practical effect because shares of EMOC Orders that are not
matched at 3:35 p.m. would be converted into regular MOC Orders.
\9\ As set forth in Rule 4754(a)(7), the term ``Current
Reference Price'' means: (i) the single price that is at or within
the current Nasdaq Market Center best bid and offer at which the
maximum number of shares of MOC, LOC, and IO orders can be paired;
or (ii) if more than one such price exists, the price that minimizes
any imbalance; or (iii) if more than one such price exists, the
entered price at which shares will remain unexecuted in the cross;
or (iv) if more than one such price exists, the price that minimizes
the distance from the bid-ask midpoint of the inside quotation
prevailing at the time of the order imbalance indicator
dissemination. The Exchange proposes to amend the definition of the
term ``Current Reference Price'' so that it also includes shares
representing EMOC Orders (even though EMOC Orders would not affect
the calculation of the Current Reference Price due to the fact that
they would be matched prior to the calculation of the Price). Nasdaq
proposes similar conforming changes to include EMOCs in the
definitions of the terms ``Far Clearing Price'' and ``Near Clearing
Price.''
\10\ Nasdaq notes that in proposing to disseminate paired EMOC
share information as part of its EOII and NOII, Nasdaq would afford
market participants time to absorb that information and to act on it
in advance of the Nasdaq Closing Cross. That said, Nasdaq does not
believe that market participants would derive any particular benefit
from knowing which of the aggregate paired shares reflected in the
EOII or NOII are attributable to EMOC Orders; such a disclosure
would not contribute to price discovery or otherwise materially
impact participants' decisions as to whether or not to participate
in the Nasdaq Closing Cross.
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All matched buy and sell EMOC Orders would remain in the System
until the Nasdaq Closing Cross occurs. The System would execute all
previously matched buy and sell EMOC orders, at the Nasdaq Closing
Cross Price, when the Nasdaq Closing Cross occurs.
If the Nasdaq Closing Cross price is selected and fewer than all
MOC, LOC, IO and Close Eligible Interest would be executed, then Orders
will be executed at the Nasdaq Closing Cross price, with previously
matched EMOCs executing first in priority, and then the remaining
Orders executing pursuant to the existing priority set forth in Rule
4754(b)(3) (as renumbered, (b)(4)). If, due to insufficient trading
interest, no Nasdaq Closing Cross occurs in a security on a trading
day, then the Exchange would cancel all matched EMOCs in the
security.\11\
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\11\ If, as of the Closing Cross cut-off time, there are matched
EMOCs and a continuous market for a security, but there is no other
crossing interest, then Nasdaq would conduct a Closing Cross with a
Closing Cross price determined pursuant to 4754(b)(2)(A). This
reflects the same procedure that the Exchange would follow in the
event that the only closing interest in a security consisted of
perfectly paired MOC Orders.
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The Exchange also proposes to amend Rule 4754 to account for EMOC
Orders in Nasdaq's auxiliary procedures and Limit-Up-Limit Down
(``LULD'') Closing Cross. First, in the event that Nasdaq employs
auxiliary procedures due to extraordinary volumes in the Closing
Cross,\12\ Nasdaq proposes to subject EMOC Orders to the same
procedures that would apply to regular MOC Orders.\13\ Second, Nasdaq
proposes to subject EMOC Orders to the same procedures that would apply
to regular MOC Orders in the event that it conducts an LULD Closing
Cross in a security.\14\
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\12\ See Rule 4754(b)(5).
\13\ However, under proposed Rule 4754(b)(6)(A), the auxiliary
procedures would provide that Nasdaq may end the order modification
and cancellation periods for EMOCs as early as 3:25 p.m., whereas
for MOCs, Nasdaq may end those periods as early as 3:40 p.m.
\14\ See Rule 4754(b)(6). Nasdaq notes that paired EMOC shares
participating in an LULD Closing Cross would be executed against
each other, and then other Order Types would execute in price/time
priority order.
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When Systems disruptions prevent the occurrence of the Nasdaq
Closing Cross in a security,\15\ such that Nasdaq invokes its
contingency procedures, Nasdaq proposes to handle EMOC Orders in the
same manner that it handles other open interest designated for the
Nasdaq close. That is, Nasdaq proposes to cancel all EMOC orders in the
event that an impairment causes it to invoke its contingency procedures
because any such impairment would prevent Nasdaq from executing the
Closing Cross in the security. Moreover, Nasdaq believes that it would
be in the best interest of participants for the Exchange to cancel
their matched EMOCs so as to allow participants determine how best to
manage their orders given the circumstances that would exist under such
a scenario.
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\15\ See Rule 4754(b)(7).
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Finally, Nasdaq notes that it proposes to make conforming changes
to various provisions of the Rules, including Rule 4703(a)(1), (c), and
(l), and Rule 4756 (a)(3).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\16\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\17\ 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, because it is an additional offering to its existing MOC
Order type, and it will provide for a competitive alternative to the
CMC order type. The proposed rule change would further remove
impediments to and perfect the mechanisms of a free and open market and
a national market system by promoting competition among national
securities exchanges in the execution of market-on-close orders for
Nasdaq-listed securities at the Nasdaq Closing Cross price.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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Unlike CMCs, which siphon off orders from the primary listing
exchanges and thereby threaten to undermine the integrity of the
primary listing exchanges' closing auction processes, the EMOC Order
Type would have no such effects. Instead, EMOC Orders are designed to
help keep market-on-close orders in Nasdaq-listed securities on Nasdaq,
which is sensible given that Nasdaq is the primary listing market for
these securities and its Closing Cross establishes their official
closing prices. The proposal would help to ensure that Nasdaq is able
to continue to conduct its industry-leading Closing Cross auction
smoothly and efficiently, and without undue complexity, to the benefit
of all participants.
Meanwhile, participants that choose to utilize EMOC Orders could
take comfort in knowing that Nasdaq, unlike BZX, is already experienced
in executing market on close orders in Nasdaq-listed securities and
that Nasdaq has a track record of doing so competently and reliably.
Moreover, because Nasdaq's Closing Cross process is subject to the
Commission's highest regulatory standards for security, integrity,
reliability, and resiliency, participants can feel at ease knowing that
Nasdaq will treat EMOC Orders with the utmost care, and that the
Commission will hold Nasdaq accountable if it fails to do so. The BZX
Market on Close process, on the other
[[Page 44336]]
hand, is untested and subject to lower regulatory standards.\18\
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\18\ See BZX Approval Order, supra, at 4734 (``[T]he fact that
closing auction systems are subject to the heightened requirements
of Regulation SCI for critical SCI systems could encourage market
participants to send MOC orders to closing auctions on the primary
listing exchanges due to the additional regulatory protections
required of such systems.'').
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The Exchange also believes that its proposed design of EMOC is
equitable, provides for a free and open market, and is in the interests
of investors and the public and a national market system. For example,
Nasdaq believes that it is equitable and in the interest of investors
to provide for unmatched shares of EMOC Orders to convert to regular
MOC Orders at 3:35 p.m. because doing so reduces the operational risk
for market participants relative to other alternatives such as CMC as
they would not have to take additional action to submit new MOC Orders
should they remain interested in participating in the Nasdaq Closing
Cross despite the lack of a match. Meanwhile, participants that do not
wish to proceed with MOC Orders in this instance would remain free to
cancel or modify their orders for at least 15 minutes after conversion.
Additionally, Nasdaq believes that it is equitable and in the
interest of investors to cancel EMOC Orders in the event that Nasdaq
does not conduct a Closing Cross because to do otherwise would force
market participants to execute EMOC Orders at prices that may be stale
\19\ and which may not reflect the true market price for such
securities. Moreover, Nasdaq notes that this proposal is the same as
how Nasdaq handles other open cross-only interest when no Closing Cross
occurs.
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\19\ If a disruption prevents the occurrence of Nasdaq Closing
Cross, then under contingency procedures described in Rule
4754(b)(7), the Exchange will execute orders at the Nasdaq Official
Closing Price, which may be, under certain circumstances, the last
consolidated last-sale eligible trade price for a security during
regular trading hours or, if there were no such trades on the day in
question, the Nasdaq Official Closing Price of the security on the
prior trading day.
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Nasdaq also believes that it is equitable and facilitates a free
and open market to handle EMOC Orders similarly to other Order Types in
the event of extraordinary volume at the close, insufficient trading
interest to conduct an LULD Closing Cross in a security following an
LULD trading pause, the occurrence of an LULD Closing Cross in a
security, and when the Exchange applies contingency procedures.
Lastly, Nasdaq believes that its proposal facilitates a free and
open market incorporating into its EOII and NOII publications the
numbers of paired shares of EMOC Orders in advance of the Nasdaq
Closing Cross. By including EMOC paired shares information in the EOII
and NOII publications, Nasdaq will ensure that market participants are
adequately informed about the depth of interest in its Closing Cross at
a point in time when they are able to act on that information by
choosing whether to participate in the Closing Cross. Nasdaq notes that
its proposal is consistent with the interests of investors and the
public to simply add EMOC-related paired shares to its aggregate EOII
and NOII disclosures of paired shares, rather than to separately
identify the number of paired shares that are due to EMOC Orders,
because the Exchange does not believe participants would gain any
valuable insights from a separate disclosure. Nasdaq notes that it does
not separately identify paired shares that are attributable to MOC or
Limit on Close Orders.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes the
proposal would increase competition among exchanges by offering a
competitive alternative to BZX's Market-On-Close process. Indeed, the
proposal will offer market participants an option to enter early market
on close orders for Nasdaq-listed stocks, while providing the added
benefit of executing those orders in a process that is recognized for
its reliability and which is more highly-regulated than is the BZX
Market Close process. Moreover, unlike other offerings that siphon
orders from the price discovery process on the primary market, Nasdaq's
proposal will not contribute to the fragmentation of the closing
process for Nasdaq-listed securities. Finally, EMOC would offer
participants reduced operational risk by automatically converting their
unmatched EMOCs to MOCs at 3:35 p.m. and retaining its original time
priority, while still affording them the opportunity to cancel
converted orders prior to the Closing Cross Cutoff Time.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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-2020-037 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-2020-037. 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
[[Page 44337]]
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-2020-037, and should
be submitted on or before August 12, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15792 Filed 7-21-20; 8:45 am]
BILLING CODE 8011-01-P