Notice2024-26192
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Anti-Internalization Functionality in Equity 4, Rule 4757
Primary source
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Published
November 13, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 219 (Wednesday, November 13, 2024)</title>
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[Federal Register Volume 89, Number 219 (Wednesday, November 13, 2024)]
[Notices]
[Pages 89677-89680]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-26192]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101520; File No. SR-NASDAQ-2024-064]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend the Exchange's Anti-Internalization Functionality in Equity 4,
Rule 4757
November 6, 2024.
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 October 25, 2024, 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, II, and III, 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 Exchange's anti-internalization
functionality in Equity 4, Rule 4757.
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 Exchange proposes to amend Equity 4, Rule 4757(a)(4) to offer
increased functionality as it relates to
[[Page 89678]]
anti-internalization. Specifically, the Exchange proposes to (i) allow
participants that directly submit orders to the System as Members on
the Exchange and submit orders to the System through Sponsored Access
\3\ as a Sponsored Participant, to direct that quotes/orders entered
into the System directly as a Member not execute against quotes/orders
submitted as a Sponsored Participant; (ii) specify when anti-
internalization will activate; (iii) introduce an anti-internalization
strategy that uses the strategy of the removing order; and (v) make
other clarifying changes.
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\3\ See General 2, Section 22(a). Sponsored Access shall mean an
arrangement whereby a member permits its customers to enter orders
into the System that bypass the member's trading system and are
routed directly to the Exchange, including routing through a service
bureau or other third party technology provider.
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Affiliate Anti-Internalization
Currently, Equity 4, Rule 4757(a)(4) provides that market
participants may direct that quotes/orders entered into the System not
execute against either quotes/orders entered under the same MPID
(``MPID Level AIQ'') or quotes/orders entered across MPIDs under Common
Ownership (``Organization Level AIQ'').\4\ In addition, market
participants using the OUCH order entry protocol may assign to orders
entered through a specific order entry port a unique group
identification modifier that will prevent quotes/orders with such
modifier from executing against each other. Anti-internalization or
self-match prevention functionality assists participants in reducing
trading costs from unwanted executions potentially resulting from the
interaction of executable buy and sell trading interest from the same
firm.
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\4\ For purposes of Equity 4, Rule 4757, the term ``Common
Ownership'' shall mean participants under 75% common ownership or
control.
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The Exchange proposes to enhance its current self-match prevention
functionality to allow participants that demonstrate (i) membership on
the Exchange through which they directly submit orders to the System
and (ii) participation as a Sponsored Participant whereby they submit
orders to the System through Sponsored Access, to direct that quotes/
orders entered into the System directly as a Member not execute against
quotes/orders submitted as a Sponsored Participant (``Affiliate Level
AIQ'').\5\ The proposed enhancement would be in addition to the other
levels of self-match prevention offered today. Under the proposed rule
change, the anti-internalization functionality would continue to be an
optional feature. If a firm chooses to take advantage of self-match
prevention, the firm would need to opt-in to the self-match prevention
functionality, as is the case today.
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\5\ The Exchange will require firms requesting to use Affiliate
Level AIQ to complete an affidavit stating: (i) it is currently a
Member of the Exchange that submits orders directly to the System,
and (ii) it also submits orders to the System through a Sponsored
Access arrangement.
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The purpose of this proposed change is to extend self-match
prevention functionality to prevent transactions between a firm's
orders submitted directly to the System and through Sponsored Access.
There are situations where an individual firm would choose to submit
orders to the Exchange through different mechanisms. For instance, a
firm may employ different trading strategies across different trading
desks and choose to send orders for one strategy to the Exchange
through a direct connection while the other strategy is sent through
Sponsored Access. The proposed functionality would serve as an
additional tool that participants may enable in order to assist with
compliance with the various securities laws relating to potentially
manipulative trading activity such as wash sales \6\ and self-
trades.\7\ Additionally, the proposed functionality would provide firms
an additional solution to manage order flow by preventing undesirable
executions where the firm submits orders in multiple formats (i.e.,
direct connection or Sponsored Access). As is the case with the
existing risk tools, participants, and not the Exchange, have full
responsibility for ensuring that their orders comply with applicable
securities rules, laws, and regulations. Furthermore, as is the case
with the existing risk settings, the Exchange does not believe that the
use of the proposed self-match prevention functionality can replace
participant-managed risk management solutions.
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\6\ A ``wash sale'' is generally defined as a trade involving no
change in beneficial ownership that is intended to produce the false
appearance of trading and is strictly prohibited under both the
federal securities laws and FINRA rules. See, e.g., 15 U.S.C
78i(a)(1); FINRA Rule 6140(b) (``Other Trading Practices'').
\7\ Self-trades are ``transactions in a security resulting from
the unintentional interaction of orders originating from the same
firm that involve no change in beneficial ownership of the
security.'' FINRA requires members to have policies and procedures
in place that are reasonably designed to review trading activity
for, and prevent, a pattern or practice of self-trades resulting
from orders originating from a single algorithm or trading desk, or
related algorithms or trading desks. See FINRA Rule 5210,
Supplementary Material .02.
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Anti-Internalization Activation
The Exchange also proposes to provide that, unless participants
designate otherwise, for anti-internalization to activate across
orders, the orders must reflect the same anti-internalization level.
For example, if an order has designated anti-internalization at an MPID
level (i.e., quotes/orders entered into the System shall not execute
against quotes/orders entered under the same MPID), anti-
internalization will only activate against another order designated
with anti-internalization at an MPID level.
This is a departure from how anti-internalization activates today.
Currently, anti-internalization activates across orders with different
anti-internalization levels. For example, a resting order with MPID
Level AIQ can have anti-internalization activated against it if an
incoming order with Organization Level AIQ has the same Organization ID
as the resting order. With the introduction of Affiliate Level AIQ, the
anti-internalization levels must match across both orders for anti-
internalization to be activated, in order to prevent erroneous
activation of anti-internalization.\8\ However, the Exchange proposes
to preserve current functionality by providing participants with the
option to elect to have anti-internalization activated against any
anti-internalization level.
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\8\ For example, assume Firm 1 accesses the Exchange directly
and as a Sponsored Participant via Firm 2. Assume Firm 1 sends an
order as a Sponsored Participant through Firm 2 with Affiliate Level
AIQ enabled. Assume Firm 2 then sends an order unrelated to Firm 1
with Organization Level AIQ. If the current behavior prevailed,
anti-internalization would activate and the orders would not
execute, resulting in an undesirable outcome.
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``Use Remover'' Strategy
The Exchange currently provides three versions of self-match
prevention functionality to allow participants to choose how orders are
handled in the event of a self-match situation: (1) decrement, (2)
cancel oldest, and (3) cancel newest. Under the first version
(``decrement''), if the self-match orders have the same share size,
both orders will cancel back to the customer. If the orders are not
equivalent in size, the smaller order will cancel back to the
originating customer and the larger order will decrement by the size of
the smaller order. The remaining shares of the larger order will remain
on the book. Under the second version (``cancel oldest''), the full
size of the order residing on the book will cancel back to the customer
if the incoming order would execute against it. The incoming order will
remain intact with no changes. Under the third version (``cancel
newest''), the full size of the order coming into the book will cancel
[[Page 89679]]
back to the customer. The resting order will remain intact with no
changes.
The Exchange proposes to add a new strategy (``use remover''),
which would allow for a resting order to use the strategy of the
removing order. If the use remover strategy is on an order, it will
only have anti-internalization activated against it when it is the
resting order and will never trigger anti-internalization against
another order when it is the incoming order. The Exchange proposes to
introduce the ``use remover'' strategy in order to maintain existing
anti-internalization functionality that would otherwise become obsolete
with the introduction of the default requirement for anti-
internalization activation (i.e., the orders must reflect the same
anti-internalization level). As described above, currently, anti-
internalization activates across orders with different anti-
internalization levels. Currently, resting orders that have anti-
internalization disabled are still subject to anti-internalization
functionality, based on the anti-internalization selection of the
incoming orders. For example, currently, if Firm 1 sends an order with
anti-internalization disabled and then Firm 2 sends an order with
Organization Level AIQ with a decrement strategy, anti-internalization
would activate between the two orders based on the incoming order's
strategy because of the Organization Level AIQ. Assuming the Firm does
not designate that anti-internalization activate across quotes/orders,
the aforementioned example would no longer occur because Affiliate
Level AIQ necessitates matching anti-internalization levels. The
Exchange wishes to maintain such functionality as an option for
participants and introduction of the use remover strategy would allow
participants to choose to have a resting order use the anti-
internalization strategy of the removing order.
Taken together, the Exchange believes that the proposed anti-
internalization enhancements would provide participants with more
tailored self-trade functionality that allows them to manage their
trading as appropriate based on the participant's business needs.
Clarifying Changes
Lastly, the Exchange proposes to make several clarifying changes to
Equity 4, Rule 4757(a)(4) to promote clarity.
First, the Exchange proposes to codify which strategy prevails when
anti-internalization strategies differ between two orders.
Specifically, the Exchange proposes to provide that, when anti-
internalization strategies differ between two orders, the strategy of
the order removing liquidity will apply and the strategy of the resting
order will be ignored. This is consistent with current Exchange and
industry practice.
In addition, the Exchange proposes to modify the text introducing
the various anti-internalization strategies to state that, ``In each
anti-internalization case, as described in this paragraph (4), a market
participant may elect from the following strategies'', to make it clear
that any strategy may be selected for each anti-internalization level.
Relatedly, the Exchange proposes to delete language stating that, ``The
foregoing options may be applied to all orders entered under the same
MPID, across MPIDs under Common Ownership, or, in the case of market
participants using the OUCH order entry protocol, may be applied to all
orders entered through a specific order entry port.'' The Exchange
believes that such language is redundant, as the modified introductory
language makes it clear that the anti-internalization strategies may be
applied to each anti-internalization level. Finally, the Exchange also
proposes to add the names of the existing anti-internalization
strategies (i.e., Decrement, Cancel Oldest, and Cancel Newest) before
the description of such strategies for clarity.
Implementation
The Exchange intends to introduce this new functionality by the
first quarter of 2025. The Exchange will issue an Equities Trader Alert
to provide notification of the change and relevant date prior to
introducing the new functionality.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ 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.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed Affiliate Level AIQ
functionality promotes just and equitable principles of trade by
allowing individual firms to better manage order flow and prevent
undesirable trading activity such as wash sales \11\ or self-trades
\12\ that may occur as a result of the velocity of trading in today's
high-speed marketplace. The proposed Affiliate Level AIQ functionality
does not introduce novel functionality, as the proposed amendment
extends the current anti-internalization functionality to another
trading relationship. For instance, a participant may operate trading
desk 1 that accesses the Exchange via the Member's direct connection,
as well as trading desk 2 that accesses the Exchange as a Sponsored
Participant. While these desks may operate different trading
strategies, a participant may desire to prevent these desks from
trading versus each other in the marketplace because the orders are
originating from the same entity. Here, participants may desire anti-
internalization functionality on an Affiliate Level AIQ that will help
them achieve compliance \13\ with regulatory rules regarding wash sales
and self-trades in a very similar manner to the way that the current
anti-internalization functionality applies to existing anti-
internalization levels. The proposed Affiliate Level AIQ functionality
will also assist participants in reducing trading costs from unwanted
executions potentially resulting from the interaction of executable buy
and sell trading interest from the same firm.
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\11\ Supra note 6.
\12\ Supra note 7.
\13\ The Exchange reminds participants that while they may
utilize anti-internalization to help prevent potential transactions
such as wash sales or self-trades, participants, not the Exchange,
are ultimately responsible for ensuring that their orders comply
with applicable rules, laws, and regulations.
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The Exchange believes that the other proposed changes, including
modifying the default procedure for activating anti-internalization
while preserving the current functionality as an option for
participants, adding the use remover strategy, and making clarifying
changes, also promote just and equitable principles of trade by
providing participants with more tailored self-trade functionality that
allows them to manage their trading as appropriate based on the
participant's business needs and providing clarity and transparency to
the rules.
The Exchange also believes that the proposed rule change is fair
and equitable and is not designed to permit unfair discrimination, in
accordance with Section 6(b)(5) of the Act,\14\ as use of the proposed
Affiliate Level AIQ functionality and related features of the proposal
are optional, and use is not a prerequisite for trading on the
Exchange.
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\14\ 15 U.S.C. 78f(b)(5).
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[[Page 89680]]
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 proposed rule change is
designed to enhance self-match prevention functionality provided to the
Exchange's participants and will benefit participants that wish to
protect their quotes and orders entered into the System directly as a
Member against trading with quotes/orders submitted as a Sponsored
Participant. The new functionality is also completely voluntary, and
members that wish to use the current functionality (or opt out
altogether) can also continue to do so. The Exchange does not believe
that providing more flexibility to participants will have any
significant impact on competition. In fact, the Exchange believes that
the proposed rule change is evidence of the competitive environment
where exchanges must continually improve their offerings to maintain
competitive standing.
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 \15\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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\15\ 15 U.S.C. 78s(b)(3)(A)(iii).
\16\ 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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f082859c95dd939f9d9d959e8483b0839593de979f86"><span class="__cf_email__" data-cfemail="7c0e091019511f1311111912080f3c0f191f521b130a">[email protected]</span></a>. Please include
file number
SR-NASDAQ-2024-064 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-2024-064. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NASDAQ-2024-064 and should
be submitted on or before December 4, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26192 Filed 11-12-24; 8:45 am]
BILLING CODE 8011-01-P
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