Notice2023-00209
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Amend Rules 4702(b)(14) and (b)(15) Concerning Dynamic M-ELO Holding Periods
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 10, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 6 (Tuesday, January 10, 2023)</title>
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[Federal Register Volume 88, Number 6 (Tuesday, January 10, 2023)]
[Notices]
[Pages 1438-1443]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00209]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96600; File No. SR-NASDAQ-2022-079]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend Rules 4702(b)(14) and
(b)(15) Concerning Dynamic M-ELO Holding Periods
January 4, 2023.
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 21, 2022, 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 Rules 4702(b)(14) and (b)(15) of the
Exchange's Rulebook to replace the static holding period requirements
for Midpoint Extended Life Orders and Midpoint Extended Life Orders
Plus Continuous Book with dynamic holding periods.
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
[[Page 1439]]
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 Rules 4702(b)(14) and (15) of the
Exchange's Rulebook to replace the static 10 millisecond holding period
requirements for its Midpoint Extended Life Order (``M-ELO'') and
Midpoint Extended Life Order Plus Continuous Book (``M-ELO+CB'') Order
Types with dynamic holding periods (``Dynamic M-ELO and M-ELO+CB'' or
collectively, ``Dynamic M-ELO'').
Background
In 2018, the Exchange introduced the M-ELO, which is a Non-
Displayed Order priced at the Midpoint between the National Best Bid
and Offer (``NBBO'') and which is eligible for execution only against
other eligible M-ELOs and only after a minimum of one-half second
passes from the time that the System accepts the order (the ``Holding
Period'').\3\ In 2019, the Exchange introduced the M-ELO+CB, which
closely resembles the M-ELO, except that a M-ELO+CB may execute at the
midpoint of the NBBO, not only against other eligible M-ELOs (and M-
ELO+CBs), but also against Non-Displayed Orders with Midpoint Pegging
and Midpoint Peg Post-Only Orders (``Midpoint Orders'') that rest on
the Continuous Book for at least one-half second and have Trade Now
enabled.\4\
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\3\ See Securities Exchange Act Release No. 34-82825 (March 7,
2018), 83 FR 10937 (March 13, 2018) (SR-NASDAQ-2017-074) (``M-ELO
Approval Order'').
\4\ See Securities Exchange Act Release No. 34-86938 (September
11, 2019), 84 FR 48978 (September 17, 2019) (SR-NASDAQ-2019-048)
(``M-ELO+CB Approval Order'').
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When the Exchange designed M-ELO, it originally set the length of
the Holding Period at one-half second because it determined that this
time period would be sufficient to ensure that likeminded investors
would interact only with each other, and with minimal market impacts.
The Exchange believed that the longer length of the M-ELO Holding
Period and its simplicity in design would provide greater protection
for participants than they could achieve through competing delay
mechanisms.
In 2020, however, the Exchange shortened the length of the Holding
Period to 10 milliseconds.\5\ The Exchange did so after studying two
years of actual use and performance of M-ELOs, as well as customer
feedback. That is, the Exchange came to understand that, while users of
M-ELO and M-ELO+CB are less concerned with achieving rapid executions
of their Orders than are other participants, they are not indifferent
about the length of time in which their M-ELOs and M-ELO+CBs must wait
before they are eligible for execution. Indeed, participants informed
the Exchange that in certain circumstances, such as when they sought to
trade symbols that on average had a lower time-to-execution than a
half-second, they were reticent to enter M-ELOs or M-ELO+CBs. They
indicated that the associated Holding Periods for these Order Types
were longer than necessary to achieve the desired protections and that,
during the residual portion of the Holding Periods, they risked losing
out on favorable execution opportunities that would otherwise be
available to them had they placed a non-MELO order.
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\5\ See Securities Exchange Act Release No. 34-88743 (April 24,
2020), 85 FR 24068 (April 30, 2020) (SR-NASDAQ-2020-011) (``M-ELO
Timer Approval Order'').
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Based upon this feedback, the Exchange studied the potential
effects of reducing the length of the Holding Periods for both M-ELOs
and M-ELO+CBs (as well as for Midpoint Orders that would execute
against M-ELO+CBs). Ultimately, the Exchange determined that it could
reduce the Holding Periods to 10 milliseconds without compromising the
protective power that M-ELO and M-ELO+CB are intended to provide to
participants and investors.\6\ Thus, the Exchange determined that
shortening the Holding Periods to 10 milliseconds for M-ELOs and M-
ELO+CBs would increase the efficacy of the mechanism while not
undermining the power of those Order Types to fulfill their underlying
purpose of minimizing market impacts. At the same time, the Exchange
determined that a reduction in the Holding Periods to 10 milliseconds
would dramatically add to the circumstances in which M-ELOs and M-
ELO+CBs would be useful to participants. In its M-ELO Timer Approval
Order, the Commission agreed with the Exchange:
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\6\ The Exchange examined each of its historical M-ELO
executions to determine at what Midpoints of the NBBO the M-ELOs
would have executed if their Holding Periods had been shorter than
one-half second (500 milliseconds). After examining the historical
effects of shorter Holding Periods of between 10 milliseconds and
400 milliseconds, the Exchange determined that a reduction of the M-
ELO Holding Period to as short as 10 milliseconds would have caused
an average impact on markouts of only 0.10 basis points (across all
symbols). In other words, compared to the execution price of an
average M-ELO with a one-half second Holding Period, the Exchange
found that a M-ELO with a 10 millisecond Holding Period would have
had an average post-execution impact that was only a tenth of a
basis point per share--a difference in protective effect that is
immaterial. See Nasdaq, ``The Midpoint Extended Life Order (M-ELO);
M-ELO Holding Period,'' available at <a href="https://www.nasdaq.com/articles/the-midpoint-extended-life-order-m-elo%3A-m-elo-holding-period-2020-02-13">https://www.nasdaq.com/articles/the-midpoint-extended-life-order-m-elo%3A-m-elo-holding-period-2020-02-13</a> (analyzing effects of shortened Holding Periods on
M-ELO performance).
The Commission notes that, with the proposed ten-millisecond
Holding Period and Resting Period, M-ELOs and M-ELO+CBs would
continue to be optional order types that are available to investors
with longer investment time horizons, including institutional
investors. The Commission also believes that the proposal could make
M-ELOs and M-ELO+CBs more attractive for securities that on average
have a time-to-execution of less than one-half second and, for
investors who currently do not use M-ELOs and M-ELO+CBs for these
securities, provide optional order types that could enhance their
ability to participate effectively on the Exchange. The Commission
notes that, if market participants determine that the proposal would
make M-ELOs and M-ELO+CBs less attractive for their particular
investment objectives, such market participants may elect to reduce
or eliminate their use of these optional order types. Moreover, as
noted above, the Exchange will continue to conduct real-time
surveillance to monitor the use of M-ELOs and M-ELO+CBs to ensure
that such usage remains appropriately tied to the intent of the
order types. If, as a result of such surveillance, the Exchange
determines that the shortened Holding Period does not serve its
intended purpose or adversely impacts market quality, the Exchange
would seek to make further recalibrations.\7\
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\7\ M-ELO Timer Approval Order, supra, at 85 FR 24069.
For similar reasons and with even better potential results for
participants, the Exchange now proposes to further refine the length of
the Holding Periods for M-ELOs and M-ELO+CBs, this time through the
application of innovative and patent pending machine learning
technology.
Dynamic M-ELO
After receiving feedback from participants that even 10 millisecond
Holding Periods for M-ELO and M-ELO+CB may, at times, exceed what is
necessary to accomplish the underlying intent of these Order Types, the
Exchange began to experiment with making further refinements to the
duration of the Holding Periods. Ultimately, the Exchange concluded
that shorter Holding Periods could achieve the same, if not better
results for participants in terms of mark-outs, but not in all
circumstances. That is, where prices of the underlying securities are
[[Page 1440]]
stable, and not subject to imminent unfavorable changes, M-ELOs and M-
ELO+CBs face lower risks of confronting spread-crossing orders, such
that shorter Holding Periods could suffice to protect M-ELOs and M-
ELO+CB from such orders. In periods of heightened price volatility,
however, M-ELOs and M-ELO+CBs also face heightened risks, such that
longer Holding Periods would continue to be beneficial in protecting M-
ELOs and M-ELO+CBs from such risks. Thus, the Exchange determined that
another across-the-board reduction of the static 10 millisecond Holding
Periods would be sub-optimal because it could impact the performance of
the M-ELO and M-ELO+CB Order Types during periods of heightened
volatility.
In light of these observations, the Exchange tasked its artificial
intelligence and machine learning laboratory (the ``AI Core Development
Group'') to explore whether it could employ these innovative
technologies to optimize the length of M-ELO and M-ELO+CB Holding
Periods during various states of price volatility, and then to vary the
lengths of the Holding Periods dynamically during the lifecycles of M-
ELOs and M-ELO+CBs, with the objectives of improving the performance of
these Order Types while also further reducing opportunity costs.
As the Exchange explains in greater depth in the attached white
paper,\8\ the AI Core Development Group proceeded to develop an
artificial intelligence-based timer control system that will achieve
these objectives.\9\ The AI Core Development Group did so by using
reinforcement learning techniques--machine learning paradigms which
develop optimal solutions to problems over time by taking actions to
solve them, generating feedback on the results of such actions,
applying that feedback to direct and improve the next round of
solutions, and then repeating the feedback loop until the paradigm
achieves optimized solutions.
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\8\ See Diana Kafkes et al., ``Applying Artificial Intelligence
& Reinforcement Learning Methods Towards Improving Execution
Outcomes,'' SSRN, October 19, 2022, available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4243985">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4243985</a> (attached hereto
as Exhibit 3) (the ``White Paper'').
\9\ Although the AI Core Development Group acknowledges that an
optimal Holding Period would update with every incoming order, it
determined that training a reinforcement learning model on every
order would be too difficult to program and too difficult to
implement given the nanosecond latency requirements of the Exchange.
The Group then investigated more feasible update cadences and
determined the point at which optimal outcomes were best balanced
with the level of programming and implementation difficulty to be
between 15 and 30 second updates. Ultimately, the Group chose a 30
second update cadence to give the model the greatest opportunity to
learn between potential actions.
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In this instance, the AI Core Development Group applied
reinforcement learning techniques to a simulation of the M-ELO Book
that it constructed using a representative data set from the first
quarter of 2022 (the ``Training Period''). The Training Period data
consisted of 380 out of the 6,257 symbols on the M-ELO Book (accounting
for approximately 67 percent of M-ELO volume). The symbols chosen
reflect both actively-traded and thinly-traded securities, and both
low-priced and high-priced securities.
The AI Core Development Group then developed a machine learning
model with more than 140 features \10\ and applied it to the Training
Period data. The Group programmed the model to value the achievement of
higher fill rates or lower mark-outs than that which occurred in a
historical simulation of M-ELOs and M-ELO+CBs involving the Training
Period data.\11\ The Group then programmed the model to seek to achieve
its goals by taking one of five possible actions with respect to the
duration of the Holding Periods at 30 second intervals \12\ for each
symbol during each trading day of the Training Period. That is, at each
30 second internal, the model evaluated market conditions for each
symbol over the prior 30 second period and either kept the Holding
Periods the same, increased/decreased them by 0.25 milliseconds, or
increased/decreased them by 0.50 milliseconds.\13\ After each decision-
making round, the model utilized the results to inform its actions at
the next 30 second increment.
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\10\ See White Paper, supra, at 31, for a description of these
features.
\11\ As the White Paper explains, the Group developed a model to
simulate activity on the Exchange involving M-ELOs and M-ELO+CBs
during the Training Period. See White Paper, supra, at 10.
\12\ See id.
\13\ The AI Core Development Group experimented with a range of
permissible Holding Period durations. Ultimately, it concluded that
it could produce better outcomes for M-ELO and M-ELO+CB participants
than the existing approach using Holding Periods as low as 0.25
milliseconds and as high as 2.5 milliseconds, under normal market
conditions.
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In making its decisions, the model considered 142 categories of
data points. A confluence of data points that correlated with an
increase in volatility tended to cause the model to increase the
durations of Holding Periods, including increases in the standard
deviation of NBBO prices, the number of unique participants placing
sell orders on M-ELO and M-ELO+CB, and the volume-weighted average of
the NBBO spread. Conversely, a confluence of data points that
correlated with greater price stability tended to cause the model to
decrease the durations of Holding periods, such as an increase in the
median and max number of shares per trade and the number of resting
bids left in the M-ELO and M-ELO+CB Book.
The AI Core Development Team produced variations of its model that
prioritized achievement of the lowest mark-outs, the highest fill
rates, and a blend of these two objectives.\14\ Through a process of
learning and experimentation, the AI Core Development Group settled on
a Dynamic M-ELO model that achieved substantial performance
improvements for users of M-ELO and M-ELO+CB--both in terms of markouts
and fill rates--as compared to the static 10 millisecond Holding
Periods. As the White Paper explains in greater detail, Dynamic M-ELO
yielded an average combined volume-weighted improvement of 31.7
percent, including a 20.3 percent increase in fill rates and a 11.4
percent reduction in mark-outs.\15\ The White Paper provides a more
fulsome explanation of these improvements.\16\
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\14\ The AI Core Development Group also applied to the model a
paradigm called ``retraining'' to combat the degradation of model
performance that can otherwise occur as the reference data it uses
for initial comparison becomes stale. Finally, the AI Core
Development group added a stability protection mechanism to the
model to provide maximum production to participants in the event
that the model observes extraordinary levels of instability in the
National Best Bid and Offer during the prior three seconds as
compared to reference data. When the model detects such instability,
it is programmed to increase the length of the Holding Period to 12
milliseconds for a period of 750 milliseconds.
\15\ See White Paper, supra, at 22.
\16\ See id.
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Based upon these exciting results, the Exchange now proposes to
amend Rule 4702(b)(14) and (15) to replace the static 10 millisecond
timers applicable to M-ELO and M-ELO+CB with Dynamic M-ELO Holding
Periods. Using the Exchange's proprietary and patent pending
technology, the Dynamic M-ELO system will evaluate and, as it deems
necessary, adjust the length of the Holding Periods for each symbol
comprising M-ELOs and M-ELO+CBs (and Midpoint Orders on the Continuous
Book that opt to interact with M-ELO+CBs after resting on the Book)
every 30 seconds throughout the Market Hours (each such 30 second
interval, a ``Change Event''). In so doing, Dynamic M-ELO will help
participants to achieve a more optimized blend of the underlying
purposes of the M-ELO
[[Page 1441]]
and M-ELO+CB Order Types: protection against adverse selection (low
mark-outs) without sacrificing opportunities to achieve high-quality
executions (high fill rates).
A proposed M-ELO or M-ELO+CB with a Dynamic Holding Period will
operate as follows. At the outset of Market Hours (approximately
9:30:00 a.m.), the Exchange will impose initial Holding Periods of 1.25
milliseconds for M-ELOs and M-ELO+CBs in all symbols. Thereafter,
Holding Periods for a given symbol will become eligible to change
dynamically from the initial duration beginning at 9:30:30AM and then
at 30 second intervals thereafter during Market Hours. The Exchange
will then apply to the M-ELO or M-ELO+CB Order a Holding Period that is
of the duration that prevailed at the time of entry. For example, if
participant A enters a M-ELO for symbol XYZ at 9:30:25 a.m., then
Holding Period for that M-ELO will be 1.25 milliseconds. If at
9:30:30:00 a.m., the System decides to lower the duration of the
Holding Period by 0.50 milliseconds, and then participant B enters a M-
ELO for symbol XYZ at 9:30:45 a.m., then the System will assign a 0.75
millisecond Holding Period to participant B's M-ELO. To be clear, the
System will determine Dynamic M-ELO Holding Periods independently for
M-ELOs and M-ELO+CBs in each symbol.
During normal market conditions, the range of potential Holding
Period durations for M-ELOs and M-ELO+CBs will be between 0.25-2.50
milliseconds, with the Holding Period duration being eligible to change
by increments of either 0.25 or 0.50 milliseconds at each Change Event.
Thus, if the Holding Period for a M-ELO in symbol XYZ is set at 0.75
milliseconds at 2:22:11 p.m., and at 2:22:41 p.m., the System
determines to increase the duration of the Holding Period, it may do so
only by 0.25 or 0.50 milliseconds during that event.
When a Change Event occurs, and the System determines to adjust the
duration of a Holding Period for a symbol, that adjustment will apply,
not only to all M-ELOs and M-ELO+CBs for that symbol entered within the
30 second period after the Change Event occurs, but also to M-ELOs and
M-ELO+CBs entered prior to the Change Event with unexpired Holding
Periods (with applicability retroactive to the time of Order
acceptance). Thus, if a participant enters a M-ELO in symbol XYZ at
1:14:299 p.m., and the prevailing Holding Period applicable to that M-
ELO is 2 milliseconds, and at 1:14:30 p.m., the System modifies the
Holding Period to be 1.5 milliseconds, then the M-ELO will become
eligible to execute at 1:14:3005 p.m. This is the case because the M-
ELO will have already expended 1 millisecond of its Holding Period as
of the time of the Change Event; thereafter, the M-ELO will need to
rest only another 0.5 milliseconds to become eligible to execute under
the new 1.5 millisecond Holding Period (as measured from 1:14:299
p.m.). This last feature ensures that the M-ELO Book maintains time
priority among M-ELOs and M-ELO+CBs in a dynamic environment. That is,
it ensures that no M-ELO or M-ELO+CB with an unexpired Holding Period
at the time of a Change Event will end up becoming eligible to execute
later than a M-ELO entered after the Change Event which has a shorter
Holding Period applicable to it.
If at any time, the System detects extraordinary instability in a
symbol, then the System will activate a ``stability protection
mechanism'' to provide an extra layer of protection to M-ELO and M-ELO
users from the heightened risks of adverse selection that exists during
such periods of instability.\17\ The stability protection mechanism
will override the prevailing Holding Periods for M-ELOs and M-ELO+CBs
in a symbol experiencing extraordinary instability and immediately
increase the duration of those Holding Periods to 12 milliseconds for a
period of 750 milliseconds. The System may activate the stability
protection mechanism even between Change Events. The System will
evaluate, at each NBBO update, whether market conditions remain
extraordinarily unstable and, if so, it will restart the 750
millisecond Stability Protected Period and maintain the 12 millisecond
Holding Period until conditions stabilize. Once the System determines
that market conditions have stabilized (i.e., all measurements for the
symbol are at or below the threshold value throughout the duration of
the prevailing Stability Protected Period), the System will revert the
duration of the Holding Periods to that which prevailed as of the
Change Event that occurred immediately prior to the activation of the
stability protection mechanism or, if the stability protection
mechanism was active when a Change Event occurred, to the duration
selected at the immediately preceding Change Event. The System will
then proceed to reevaluate the duration of the Holding Periods as per
the regular schedule of Change Events.
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\17\ For purposes of this Rule, the System determines that
``extraordinary instability'' for a symbol exists through
observations it makes following every change in the NBBO for that
symbol that occurs during the trading day. When the NBBO changes,
the System looks back at the prior three seconds of trading and
measures the difference between the highest and the lowest NBBO
midpoint values that occurred during that period, and then it
compares that measurement to a threshold value for the symbol. The
System concludes that extraordinary instability exists for a symbol
if the measurement exceeds the threshold value.
The threshold value for a symbol, in turn, is the difference
between the highest and the lowest NBBO midpoint values for the
symbol that, if applied to its trading activity during the prior
trading day, would have caused the System to deem trading in the
symbol to be extraordinarily unstable for as close to one percent of
that day as possible.
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The following is an illustration of the operation of the stability
protection mechanism. At 11:10:04 a.m., the prevailing Holding Period
for M-ELOs in symbol XYZ is 1.5 milliseconds. At the same time, the
NBBO for symbol XYZ updates. The System looks back at the prior three
seconds of trading in symbol XYZ and finds that during that period, the
highest observed NBBO midpoint was $10.05, and the lowest was $10.00,
such that the difference between these two values is a range of $0.05.
The System then looks back at trading behavior for symbol XYZ during
the immediately preceding trading day. In doing so, the System
calculates the value of the threshold that would have caused the symbol
to be deemed extraordinarily unstable for one percent of the trading
day; the System determines that this threshold value is a range of
$0.03. The System then compares the $0.03 threshold to its measurement
of the prior three seconds of NBBO changes ($0.05), and concludes that
over these past three seconds, the symbol is extraordinarily unstable.
Accordingly, the System activates the stability protection mechanism
and the Holding Period for M-ELOs in symbol XYZ immediately increases
to 12 milliseconds for a period of 750 milliseconds. However, 5
milliseconds after the Stability Protection Period commences, the NBBO
updates again, thus prompting the System to repeat its assessment of
the stability of the symbol in light of the update. This reassessment
reveals that the symbol remains unstable, such that a new Stability
Protection Period of 750 milliseconds begins at that time (overriding
the pre-existing Period). Over the course of this new Stability
Protection Period, the NBBO shifts two more times, but each of the
ensuing reassessments indicate that the NBBO ranges for the symbol have
fallen below the $0.03 threshold. The Stability Protection Period
elapses 750 milliseconds after it began with the symbol remaining
stable. Thus, the Holding Period reverts to 1.5 milliseconds.
If the Exchange halts trading in a symbol, then upon resumption of
[[Page 1442]]
trading, any new M-ELO or M-ELO+CB in that symbol and any pending M-ELO
or M-ELO+CB in that symbol with an unexpired Holding Period will be
subject to a new 12 milliseconds Holding Period (running from the time
when trading resumes) until the next scheduled Change Event, at which
point the System may determine to adjust that Holding Period to a
duration within the range applicable under normal market
conditions.\18\ If, however, the System determines that extraordinary
instability in the symbol exists, it may instead determine to activate
the stability protection mechanism and maintain the duration of the
Holding Period at 12 milliseconds for another 750 milliseconds. This
design will help to ensure that M-ELOs and M-ELO+CBs receive added
protection coming out of halt conditions.\19\
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\18\ Prior to commencement of a new 12 millisecond Holding
Period for a new or pending M-ELO or M-ELO+CB following a Halt, the
System will first determine whether the M-ELO or M-ELO+CB is or
remains eligible for execution. That is, the Holding Period will
commence only if, upon commencement of trading following the Halt,
the midpoint price for the Order is within the limit set by the
participant. If not, the System will hold the Order until the
midpoint falls within the limit set by the participant, at which
time the 12 millisecond Holding Period will commence.
\19\ Also as a safeguard, the System will apply a default
Holding Period of 12 milliseconds to a M-ELO or M-ELO+CB if ever it
fails to receive a signal during a Change Event as to whether the
System should adjust or maintain the duration of the prevailing
Holding Period. The System will continue to apply the default 12
millisecond Holding Period until the next Change Event where the
signal is restored and the System is able to act dynamically again.
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The Exchange notes that same dynamic process described above will
also apply to and govern the time periods during which Midpoint Orders
on the Continuous Book must rest before they will become eligible to
interact with M-ELO+CBs (provided that participants have opted for
their Midpoint Orders to interact with M-ELO+CBs). Thus, the same
Holding Period duration that the System sets for a M-ELO+CB in a symbol
during Regular Market Hours will also be the length of time that a
Midpoint Order must rest on the Continuous Book must rest before it may
interact with a M-ELO+CB.
Apart from these impacts of Dynamic Holding Periods, M-ELOs and M-
ELO+CBs will continue to behave as they do now in all respects, and as
set forth in Rules 4702(b)(14) and (15).
It is important to note that within the parameters discussed herein
and in the White Paper, the Exchange will continue to re-train Dynamic
M-ELO and M-ELO+CB regularly so that the model will continue to learn
from and act upon the basis of new data, and further improve its
performance over time. However, the Exchange will not modify the
underlying structure of Dynamic M-ELO and M-ELO+CB without first
obtaining the Commission's approval to do so, including modifications
to the conditions under which the model will adjust the duration of
Holding Periods, the frequency with which the model my adjust the
Holding Periods, and the range of Holding Period durations available to
M-ELOs and M-ELO+CBs.\20\
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\20\ In addition to the proposed changes described above, the
Exchange proposes to delete an extraneous reference in Rule
4702(b)(15) to M-ELO+CB being eligible to execute against a Midpoint
Order on the Continuous Book if the Continuous Book order has the
``Midpoint'' Trade Now Attribute enabled. In a prior filing, the
Exchange folded the concept of ``Midpoint Trade Now'' into the
general ``Trade Now'' Attribute. See Securities Exchange Act Release
No. 34-92180 (June 15, 2021), 86 FR 33420 (June 24, 2021)(SR-NASDAQ-
2021-044).
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Implementation
The Exchange intends to make the proposed change effective for M-
ELOs and M-ELO+CBs in the Second or Third Quarter of 2023, but that
time frame is subject to change. The Exchange will publish a Trader
Alert in advance of making the proposed change effective.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\21\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\22\ 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, by allowing for more widespread use of M-ELOs and M-ELO+CBs.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
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When the Commission approved the M-ELO and the M-ELO+CB, it
determined that these Order Types are consistent with the Act because
they ``could create additional and more efficient trading opportunities
on the Exchange for investors with longer investment time horizons,
including institutional investors, and could provide these investors
with an ability to limit the information leakage and the market impact
that could result from their orders.'' \23\ Nothing about the
Exchange's proposal should cause the Commission to revisit or rethink
this determination. Indeed, the proposal will not alter the fundamental
design of these Order Types, the manner in which they operate, or their
effects.
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\23\ M-ELO Approval Order, supra 83 FR at 10938-39; M-ELO+CB
Approval Order, supra, 84 FR at 48980.
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Even with Dynamic M-ELO Holding Periods, M-ELOs and M-ELO+CBs will
continue to provide their users with protection against information
leakage and adverse selection--and they will do so at levels which are
substantially undiminished from that which they provide now.\24\
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\24\ See note 6, supra.
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At the same time, however, the proposal will benefit market
participants and investors by reducing the opportunity costs of
utilizing M-ELOs and M-ELO+CBs. The proposal, in other words, will re-
calibrate the lengths of the Holding Periods so that M-ELOs and M-
ELO+CBs will operate in the ``Goldilocks'' zone--their Holding Periods
will not be so short as to render them unable to provide meaningful
protections against information leakage and adverse selection, but the
Holding Periods also will not be too long so as to cause participants
and investors to miss out on favorable execution opportunities. Nasdaq
believes the proposal will render M-ELOs and M-ELO+CBs more useful and
attractive to market participants and investors, and this increased
utility and attractiveness, in turn, will spur an increase in M-ELO and
M-ELO+CB use cases on the Exchange, both from new and existing users of
M-ELOs and M-ELO+CBs. Ultimately, the proposal should enhance market
quality by increasing opportunities for midpoint executions on the
Exchange.
The Exchange notes that use of Dynamic M-ELOs and M-ELO+CBs remains
voluntary for all market participants. Accordingly, if any market
participant feels that the dynamic Holding Periods are still too long
or too short or because competing venues offer more attractive delay
mechanisms, then the participants are free to pursue other trading
strategies or utilize other trading venues. They need not utilize
Dynamic M-ELOs or M-ELO+CBs.
Finally, the Exchange notes that it will continue to conduct real-
time surveillance to monitor the use of M-ELOs and M-ELO+CBs to ensure
that such usage remains appropriately tied to the intent of the Order
Types. If, as a result of such surveillance, the Exchange determines
that the Dynamic M-ELO Holding Periods do not serve their intended
purposes, or adversely impact market quality, then the Exchange will
seek to make further re-calibrations.
[[Page 1443]]
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. To the contrary, the Exchange
believes that this proposal will promote the competitiveness of the
Exchange by rendering its M-ELO and M-ELO+CB Order Types more
attractive to participants.
The Exchange adopted the M-ELO and M-ELO+CB as pro-competitive
measures intended to increase participation on the Exchange by allowing
certain market participants that may currently be underserved on
regulated exchanges to compete based on elements other than speed. The
proposed change continues to achieve this purpose. With Dynamic M-ELO
Holding Periods, both M-ELOs and M-ELO+CBs will afford their users with
a level of protection from information leakage and adverse selection
that is better from what is achievable at present.\25\ At the same
time, the Dynamic Holding Periods will increase opportunities to
interact with other like-minded investors with longer time horizons
while also lowering the opportunity costs for participants that utilize
M-ELOs and M-ELO+CBs, particularly for securities that trade within the
``Goldilocks'' zone. In sum, the proposed changes will not burden
competition, but instead may promote competition for liquidity in M-
ELOs and M-ELO+CBs by broadening the circumstances in which market
participants may find such Orders to be useful. With the proposed
changes, market participants will be more likely to determine that the
benefits of entering M-ELOs and M-ELO+CBs outweigh the risks of doing
so.
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\25\ See White Paper, supra.
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The proposed change will not place a burden on competition among
market venues, as any market may adopt an order type that operates
similarly to a M-ELO or a M-ELO+CB with Dynamic M-ELO Holding Periods.
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 of such
date (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 Exchange consents, the Commission shall: (a) by order
approve or disapprove such 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#681a1d040d450b0705050d061c1b281b0d0b460f071e"><span class="__cf_email__" data-cfemail="8efcfbe2eba3ede1e3e3ebe0fafdcefdebeda0e9e1f8">[email protected]</span></a>. Please include
File Number SR-NASDAQ-2022-079 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-2022-079. 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 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 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-2022-079 and should be submitted on or before January
31, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00209 Filed 1-9-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 10, 2023.
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