Notice2021-28519
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Amend Rule 4754 Related to Certain Order Handling in the LULD Closing Cross
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Published
January 5, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 3 (Wednesday, January 5, 2022)</title>
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[Federal Register Volume 87, Number 3 (Wednesday, January 5, 2022)]
[Notices]
[Pages 501-504]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-28519]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93876; File No. SR-NASDAQ-2021-101]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend Rule 4754 Related to
Certain Order Handling in the LULD Closing Cross
December 29, 2021.
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 December 22, 2021, 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 a proposal to amend its rule related to
certain order handling in the Limit-Up Limit-Down (``LULD'') closing
cross.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, 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 purpose of the proposed rule change is to amend Equity 4, Rule
4754 \3\ related to certain order handling in the LULD closing cross
(``LULD Closing Cross'').\4\ On May 28, 2021, the Commission approved
the Exchange's proposal to make certain changes to the Exchange's LULD
Closing Cross, including the timing of the LULD Closing Cross, the
process for determining the LULD Closing Cross price, establishing
price protections for the LULD Closing Cross, the handling of on-close
orders, and the imbalance information disseminated for the LULD Closing
Cross.\5\ The Exchange has not yet implemented the proposed LULD
Closing Cross changes in SR-NASDAQ-2021-009, and recently filed to
delay implementation in order to allow the Exchange additional time to
test and implement these functionalities.\6\
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\3\ All Rule 4000 series referenced in this filing are within
Equity 4.
\4\ The LULD Closing Cross is the Exchange's auction process for
executing closing trades in Nasdaq-listed securities when a Trading
Pause pursuant to Rule 4120(a)(12) exists at or after 3:50 p.m. and
before 4:00 p.m. ET. See Rule 4754(b)(6).
\5\ See Securities Exchange Act Release No. 92068 (May 28,
2021), 86 FR 29864 (June 3, 2021) (SR-NASDAQ-2021-009) (``Approval
Order'').
\6\ See Securities Exchange Act Release No. 93250 (October 4,
2021), 86 FR 56307 (October 8, 2021) (SR-NASDAQ-2021-077).
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During the testing conducted to date, Nasdaq has identified some
changes that it wishes to make to the approved rule governing the LULD
Closing Cross in Rule 4754(b)(6). Accordingly, the Exchange is
submitting this proposal to
[[Page 502]]
amend the rule text prior to implementation. Specifically, the Exchange
is proposing to provide that in the context of the LULD Closing Cross,
Limit on Close (``LOC'') orders \7\ entered between 3:55 p.m. ET and
immediately prior to 3:58 p.m. ET (``late LOC orders'') will use the
same reference prices for re-pricing as the reference prices used
during the standard Nasdaq Closing Cross.\8\
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\7\ A ``Limit On Close Order'' or ``LOC Order'' is an Order Type
entered with a price that may be executed only in the Nasdaq Closing
Cross, and only if the price determined by the Nasdaq Closing Cross
is equal to or better than the price at which the LOC Order was
entered. See Rule 4702(b)(12).
\8\ ``Nasdaq Closing Cross'' shall mean the process for
determining the price at which orders shall be executed at the close
and for executing those orders. See Rule 4754(a)(6).
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Today, Rule 4702(b)(12) describes the treatment of late LOC orders
during the standard Closing Cross. The Rule provides that late LOC
orders may be entered between 3:55 p.m. ET and immediately prior to
3:58 p.m. ET provided that there is a First Reference Price \9\ (i.e.,
the Current Reference Price \10\ disseminated at 3:50 p.m. ET) or a
Second Reference Price \11\ (i.e., the Current Reference Price
disseminated at 3:55 p.m. ET). Between 3:55 p.m. ET and immediately
prior to 3:58 p.m. ET, LOC Orders can only be cancelled and/or modified
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). LOC Orders cannot be cancelled or modified at or after 3:58
p.m.
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\9\ ``First Reference Price'' shall mean the Current Reference
Price in the Early Order Imbalance Indicator (``EOII'') disseminated
at 3:50 p.m. ET, or 10 minutes prior to the early closing time on a
day when Nasdaq closes early. See Rule 4754(a)(9).
\10\ ``Current Reference Price'' means the following: (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; (ii) if more than one price exists
under subparagraph (i), the Current Reference Price shall mean the
price that minimizes any Imbalance; (iii) it more than one price
exists under subparagraph (ii), the Current Reference Price shall
mean the entered price at which shares will remain unexecuted in the
cross; or (iv) if more than one price exists under subparagraph
(iii), the Current Reference Price shall mean 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. See Rule 4754(a)(7)(A).
\11\ ``Second Reference Price'' shall mean the Current Reference
Price in the Order Imbalance Indicator (``NOII'') disseminated at
3:55 p.m. ET, or five minutes prior to the early closing time on a
day when Nasdaq closes early. See Rule 4754(a)(11).
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A late LOC order will be accepted at its limit price, unless its
limit price is higher (lower) than the higher (lower) of the First
Reference Price and the Second Reference Price for a late LOC order to
buy (sell), in which case the late LOC order will be handled consistent
with the Participant's instruction that the late LOC order is to be:
(1) Rejected; or (2) re-priced to the higher (lower) of the First
Reference Price and the Second Reference Price.\12\
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\12\ Furthermore, if either the First Reference Price or the
Second Reference Price is not at a permissible minimum increment,
the First Reference Price or the Second Reference Price, as
applicable, will be rounded (i) to the nearest permitted minimum
increment (with midpoint prices being rounded up) if there is no
imbalance, (ii) up if there is a buy imbalance, or (iii) down if
there is a sell imbalance. The default configuration for
Participants that do not specify otherwise will be to have such late
LOC orders re-priced rather than rejected. See Rule 4702(b)(12).
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As stated in SR-NASDAQ-2021-009, the intent of the proposed rule
change was to align the LULD Closing Cross process as closely as
possible to the standard Closing Cross process, including the handling
of various closing cross order types like LOC orders (and their subset,
late LOC orders). As such, the Exchange amended Rule 4754(b)(6)(F)(ii)
to provide that MOC, LOC, and IO orders may be entered, modified, and
cancelled pursuant to Rules 4702(b)(11), 4702(b)(12), and 4702(b)(13)
to allow these order types to participate in the LULD Closing Cross in
the same way as a standard Closing Cross. This includes accepting late
LOC orders during the LULD Closing Cross and re-pricing (in certain
cases) these orders to the more aggressive of First Reference Price or
Second Reference Price in the same way as a standard Closing Cross.
In the context of the standard Closing Cross, the First Reference
Price and the Second Reference Price, at the time of their
dissemination at 3:50 p.m. ET and 3:55 p.m. ET, respectively, each
represent the current price, bounded by the continuous market (i.e.,
the Nasdaq best bid and offer), at which paired on-close shares are
maximized (with certain tie-breakers if multiple prices meet this
criterion).\13\ SR-NASDAQ-2021-009, however, defined the 3:50 p.m. ET
reference price and 3:55 p.m. ET reference price in the context of the
LULD Closing Cross as the price at which the LULD Closing Cross would
execute should the cross conclude at that time, and further indicated
that the reference price would be bounded by the benchmark prices.\14\
As described in SR-NASDAQ-2021-009, the benchmark prices represent the
price range within which the LULD Closing Cross price must fall and are
calculated off the last disseminated LULD Auction Collar or the LULD
Band that triggered the Trading Pause, as further described in Rule
4754(b)(6)(E). As a result of the foregoing, in cases where a Trading
Pause exists at or prior to 3:50 p.m. ET, the 3:50 and 3:55 p.m. ET
reference prices in the LULD Closing Cross would not be bounded by
continuous market (i.e., the Nasdaq best bid and offer) like the 3:50
and 3:55 p.m. ET reference prices in the standard Closing Cross as
there was no continuous market in the halted security during those
times, and those reference prices in the LULD Closing Cross would
instead be bounded by the benchmark prices described above. Similarly,
if a Trading Pause is triggered after 3:50 p.m. ET but before 3:55 p.m.
ET, the 3:50 reference price would reflect and be bounded by the Nasdaq
best bid and offer at the time of dissemination like the 3:50 reference
price used in a standard Closing Cross whereas the 3:55 reference price
would not. Lastly, if a Trading Pause is triggered after 3:55 p.m. ET,
both the 3:50 and 3:55 reference prices would reflect and be bounded by
the Nasdaq best bid and offer at the time of dissemination like the
reference prices used in a standard Closing Cross. The consequence of
using the LULD Closing Cross-derived reference price and not the
standard Closing Cross-derived reference price may result in late LOC
orders being accepted and potentially repriced to 3:50 or 3:55 p.m. ET
reference prices that are not reflective of the continuous market at
the time of their dissemination (i.e., reference prices disseminated at
a time when trading has been paused and that are not bounded by the
Nasdaq best bid and offer), and which are bounded by benchmark prices
that are calculated off the last disseminated LULD Auction Collar or
the LULD Band that triggered the Trading Pause. The Exchange believes
that this is inconsistent with market participant expectations of how
late LOC orders would be normally repriced during a closing cross
process (i.e., repriced to reference prices disseminated at a time when
trading has been paused and that are not bounded by the Nasdaq best bid
and offer), and therefore proposes to amend late LOC order handling so
that its LULD Closing Cross and standard Closing Cross processes are
more consistent.
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\13\ See definition of Current Reference Price in Rule
4754(a)(7)(A).
\14\ See Approval Order at 29866.
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Accordingly, the Exchange proposes to state in its rules that it
will only accept and if needed, re-price a late LOC order in the LULD
Closing Cross if a standard Closing Cross-derived reference price
(i.e., First Reference Price or Second Reference Price) is available.
In particular, the Exchange proposes to add the following language at
the end of Rule 4754(b)(6)(F)(ii):
[[Page 503]]
With respect to LOC orders entered between 3:55 p.m. ET and
immediately prior to 3:58 p.m. ET (hereinafter, ``late LOC orders''),
the System will handle such orders in the LULD Closing Cross as
follows:
(a) If the security entered a Trading Pause prior and up to 3:50
p.m., the System will not accept late LOC orders.\15\
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\15\ The System will not accept late LOC orders in this scenario
because if a security entered a Trading Pause prior and up to 3:50
p.m. ET, there would not be a First Reference Price or a Second
Reference Price for the standard Closing Cross.
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(b) If the security entered a Trading Pause after 3:50 p.m. and up
to 3:55 p.m., the System will accept late LOC orders, provided that
there is a First Reference Price. Such orders may then be subject to
re-pricing in accordance with Rule 4702(b)(12) or rejected, in either
case consistent with the Participant's instructions.\16\
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\16\ The System will accept late LOC orders provided there is a
First Reference Price because in this scenario, the security entered
a Trading Pause after 3:50 p.m. ET (but before 3:55 p.m. ET) so the
First Reference Price would be disseminated at 3:50 p.m. ET for the
standard Closing Cross but the Second Reference Price for the
standard Closing Cross would not be disseminated at 3:55 p.m. ET.
The option to have the Participant's aggressively priced late LOC
order rejected instead of re-priced is consistent with the standard
Closing Cross. See Rule 4702(b)(12).
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(c) If the security entered a Trading Pause after 3:55 p.m., the
System will accept late LOC orders, provided that there is a First
Reference Price or a Second Reference Price. Such orders may then be
subject to re-pricing in accordance with Rule 4702(b)(12) or rejected,
in either case consistent with the Participant's instructions.\17\
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\17\ The System will accept late LOC orders provided there is a
First Reference Price or Second Reference Price because in this
scenario, the security entered a Trading Pause after 3:55 p.m. ET so
both the First Reference Price and the Second Reference Price would
be disseminated for the standard Closing Cross.
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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 because it would amend the LULD Closing Cross process with
respect to certain LOC order handling as approved in SR-NASDAQ-2021-009
in order to further align the LULD Closing Cross with the standard
Nasdaq Closing Cross. Specifically, the Exchange is proposing to
provide in Rule 4754(b)(6)(F)(ii) that it will only accept and if
needed, re-price a late LOC order in the LULD Closing Cross if a First
Reference Price or Second Reference Price for the standard Closing
Cross is available, identical to the handling of late LOC orders for
the standard Closing Cross. As discussed above, in the context of the
standard Closing Cross, the First Reference Price and the Second
Reference Price, at the time of their dissemination at 3:50 p.m. ET and
3:55 p.m. ET, respectively, each represent the current price, bounded
by the continuous market (i.e., the Nasdaq best and offer), at which
paired on-close shares are maximized. SR-NASDAQ-2021-009, however,
defined the 3:50 p.m. ET reference price and 3:55 p.m. ET reference
price in the context of the LULD Closing Cross as the price, bounded by
the benchmark prices, at which the LULD Closing Cross would execute
should the cross conclude at that time. Because the benchmark prices
are based on the LULD Auction Collar or LULD Band instead of the
continuous market, the consequence of using the LULD Closing Cross-
derived reference price and not the standard Closing Cross-derived
reference price may result in late LOC orders being accepted and
potentially repriced to 3:50 or 3:55 reference prices that are not
reflective of the continuous market at the time of their dissemination
(i.e., reference prices disseminated at a time when trading has been
paused and that are not bounded by the Nasdaq best bid and offer), and
which are bounded by benchmark prices that are calculated off the last
disseminated LULD Auction Collar or the LULD Band that triggered the
Trading Pause. The Exchange believes that this is an undesirable
outcome and contrary to market participant expectations of how a late
LOC order would normally be repriced by the Exchange. The Exchange
believes that the proposed changes will align the LULD Closing Cross
with the standard Closing Cross more closely, thereby promoting a more
consistent experience for market participants, and reducing any
potential confusion regarding Nasdaq's closing processes.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Rather, the proposed changes
would allow the Exchange to make certain changes to the Exchange's
rules and functionality related to certain LOC order handling in the
LULD Closing Cross in a manner consistent with the current standard
Closing Cross. Ultimately, the Exchange believes that the proposed
changes will render the LULD Closing Cross more attractive to market
participants by providing a more consistent experience for Nasdaq's
closing processes.
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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6311160f064e000c0e0e060d1710231006004d040c15"><span class="__cf_email__" data-cfemail="750700191058161a1818101b0106350610165b121a03">[email protected]</span></a>. Please include
File Number SR-NASDAQ-2021-101 on the subject line.
Paper Comments
<bullet> 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-2021-101. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent
[[Page 504]]
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-2021-101 and should be submitted on or before January 26, 2022.
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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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021-28519 Filed 1-4-22; 8:45 am]
BILLING CODE 8011-01-P
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