Notice2024-27019
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Amend Equity 4 To Establish Halt Cross Price Protections and Make Other Related Changes
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
November 20, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 224 (Wednesday, November 20, 2024)</title>
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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Notices]
[Pages 91853-91862]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27019]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 101620; File No. SR-NASDAQ-2024-065]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend Equity 4 To Establish
Halt Cross Price Protections and Make Other Related Changes
November 14, 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 November 6, 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 Equity 4 to establish halt cross
price protections and make other related changes.
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 the Exchange's
[[Page 91854]]
Rules to implement halt cross protections to prevent clearly erroneous
executions after the reopening of trading and ensure that securities
are priced within reasonable levels from their halted price. The
Exchange proposes to introduce price protections to the halt cross
process that are similar to the protections currently employed in other
auctions the Exchange conducts. In addition, the Exchange proposes to
establish a ``Hybrid Closing Cross'' and introduce related price
protections, as described below. With the proposed changes, the
Exchange's processes would be more harmonized, which the Exchange
believes would promote a more consistent experience for members and
investors participating in the Exchange's auctions.
To implement the proposed price protections, the Exchange proposes
to modify Equity 4 by: (i) adding the proposed halt cross protections
to Equity 4, Section 4120,\3\ replacing the prior procedures; (ii)
adding information about dissemination of Auction Reference Prices and
Auction Collars in Rule 4753(a)(3); and (iii) adding Rules for a
modified closing cross in Rule 4754(b)(7).
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\3\ All of the Rule 4000 series referenced in this filing are
within Equity 4.
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In addition, the Exchange proposes to make a number of changes in
Equity 4, including: (i) removing references to the Limit-Up-Limit-Down
(``LULD'') Closing Cross in Rule 4702 and Rule 4755; (ii) clarifying
how Auction Reference Prices and Auction Collars are disseminated in
Rule 4753(a)(3); (iii) clarifying rule language about cancellation of
IOC Orders for halted securities in Rule 4753(e); (iv) specifying that
the Nasdaq Closing Cross shall include the LULD Closing Cross and the
Hybrid Closing Cross in Rule 4754(a)(6); (v) adding ``NOII'' as an
alternative defined term for ``Order Imbalance Indicator'' in Rule
4754(a)(7); (vi) adding ``EOII'' as an alternative defined term for
``Early Order Imbalance Indicator'' in Rule 4754(a)(10); (vii) amending
language related to handling of late Limit on Close (``LOC'') Orders
\4\ in Rule 4754(b)(6); and (viii) modifying the priority for orders
participating in the LULD Closing Cross in Rule 4754(b)(6).
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\4\ 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 or the LULD Closing Cross, and only if the price determined by
the Nasdaq Closing Cross or the LULD Closing Cross is equal to or
better than the price at which the LOC Order was entered. See Rule
4702(b)(12).
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Background
The Exchange currently offers price protection mechanisms in most
of the auctions it conducts during the normal course of trading
(including opening/closing auction, market-wide circuit breaker
(``MWCB'') halts,\5\ and LULD pauses \6\). In February 2023, there was
an instance where a stock was halted for pending news and reopened at a
price that was significantly away from its current market value due to
an erroneous market order. Given such event, the Exchange believes that
additional price protections specific to the halt cross process are
needed. Implementing these new protections would help to ensure that
securities reopen within a reasonable price range after the Exchange
halts a security.
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\5\ A market-wide circuit breaker is triggered if the price of
the S&P 500 Index declines by a specified amount compared to the
closing price for the immediately preceding trading day. See Rule
4121.
\6\ A LULD pause is a trading pause pursuant to the Plan to
Address Extraordinary Market Volatility or ``LULD Plan''. See
<a href="https://www.luldplan.com/">https://www.luldplan.com/</a>.
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The Exchange proposes to implement a new price protection mechanism
to the Nasdaq Halt Cross \7\ process. In 2017, the Exchange amended its
auction process for reopening a Nasdaq listed security following a
trading pause initiated pursuant to the LULD Plan.\8\ Specifically, the
Exchange modified its Rules such that initial Auction Collars following
a trading pause are calculated based on the Price Band that triggered
the trading pause, and instituted the process for extending the auction
and further widening the collars if necessary to accommodate buy or
sell pressure outside of the collars then in effect.\9\ In 2020, the
Exchange amended its auction process for reopening a Nasdaq listed
security following a MWCB halt to follow a process similar to the
process applied for releasing a security following a trading pause
under the LULD Plan.\10\ The Exchange believes that these changes have
been effective in facilitating a fair and orderly market following
trading pauses initiated pursuant to the LULD Plan and following MWCB
halts, and proposes to implement similar functionality for certain
trading halts.\11\ The Exchange believes that the proposed changes
would promote price formation and provide a more consistent reopening
process for members and investors following such trading halts.
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\7\ The ``Nasdaq Halt Cross'' is the process for determining the
price at which Eligible Interest shall be executed at the open of
trading for a halted security and for executing that Eligible
Interest. See Rule 4753(a)(4). ``Eligible Interest'' shall mean any
quotation or any order that has been entered into the system and
designated with a time-in-force that would allow the order to be in
force at the time of the Halt Cross. See Nasdaq Rule 4753(a)(5).
\8\ See Securities Exchange Act Release No. 79876 (January 25,
2017), 82 FR 8888 (January 31, 2017) (SR-NASDAQ-2016-131).
\9\ Id.
\10\ See Securities Exchange Act Release No. 88383 (March 13,
2020), 85 FR 15819 (March 19, 2020) (SR-NASDAQ-2020-012).
\11\ See infra note 13. The Exchange also notes that both NYSE
Arca, Inc. and Cboe BZX Exchange, Inc. implemented similar processes
for resuming trading following non-LULD regulatory halts. See
Securities Exchange Act Release Nos. 79846 (January 19, 2017), 82 FR
8548 (January 26, 2017) (SR-NYSEArca-2016-130); and 84927 (December
21, 2018), 83 FR 67768 (December 31, 2018) (SRCboeBZX-2018-090).
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The new price protection mechanism would be similar to what is
currently utilized for reopening stocks following a MWCB halt or LULD
trading pause, where pre-determined price collars would be built into
the halt cross process. As described in more detail below, the Exchange
proposes to establish a threshold of 10% below and above a reference
price, within which the price of the stock must fall to reopen. If the
price falls outside of those collars after an initial 5-minute display-
only period, the collars would be widened by the same threshold amount
as the initial collars and a subsequent 5-minute display-only period
would commence. If the price falls outside of those collars after the
second 5-minute display-only period, the collars would be widened by
20% below and above the reference price and a third 5-minute period
would commence. This process would continue (at 20%) until the price
falls within the set thresholds, after which the auction would execute
and the stock would reopen for trading.
Customers would benefit from having the new price collar
protections in place as it would ensure that executions received during
the halt cross process are filled at prices that reflect the true
market for the security. Allowing additional time for improved price
discovery could increase market participation, improving liquidity and
helping reduce price volatility.\12\
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\12\ During 2023, there were 541 halts that would have been
subject to the proposed rule if it was in effect at the time. Of
those 540 halts, 296 of the securities would have fallen outside of
a 10% collar after the first quoting period. Example A on page 8
illustrates the proposed price protections.
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Proposed Changes to Rule 4120 (Limit Up-Limit Down Plan and Trading
Halts)
As noted above, the Exchange proposes to introduce price
protections to the halt cross process that are similar to the
protections used today for reopening stocks following a LULD pause and
MWCB halt and would ensure that the reopening price is reasonably
related to current market conditions. The Exchange proposes to remove
the current procedure for terminating certain trading halts provided in
Rule 4120(c)(7) and replace
[[Page 91855]]
with proposed rule language describing the new procedure in proposed
Rule 4120(c)(7). The Exchange believes that the imposition of price
collars and a mechanism similar to what it currently utilized for
reopening a security following a LULD trading pause or a MWCB halt
would provide the Exchange with a price protection mechanism that is
lacking under the Exchange's current Rules. The current reopening
process does not have a mechanism for calculating price collars and a
process for widening the collars if necessary to accommodate buy or
sell pressure outside of the collars then in effect. The Exchange
believes that its proposal would facilitate a fair and orderly market
by reducing the potential for significant price disparity in post-
auction trading.
Example A: The below is illustrative of the proposed price
protections to the halt cross process:
<bullet> 1:30p.m.: assume symbol ABC enters a regulatory halt; the
last sale/reference price is $100.00; and auction collars are
calculated at $90.00/$110.00;
<bullet> 1:35p.m.: the calculated auction reference price is
$114.00; the display only period is extended to 1:40pm; and the new
auction collars are $80.00/$120.00;
<bullet> 1:40p.m.: the calculated auction reference price is
$122.00; the display only period is extended to 1:45pm; and the new
auction collars are $60.00/$140.00;
<bullet> 1:45p.m.: the calculated auction reference price is
$132.00; at 1:45:01pm, there is no longer an order imbalance so the
halt cross commences and the security is released for trading.
The introductory language in proposed Rule 4120(c)(7) provides
that, a trading halt initiated under Rule 4120(a)(1), (4), (5), (6),
(9), (10), (11) or (14) \13\ shall be terminated when Nasdaq releases
the security for trading. It would also provide that, for any such
security listed on Nasdaq, prior to terminating the halt, there would
be a 5-minute ``Initial Display Only Period'' during which market
participants may enter quotations and orders in that security in Nasdaq
systems. This is consistent with the process employed for reopening
securities following LULD trading pauses.\14\ This is also consistent
with the process employed for reopening securities following MWCB
halts, except that in the case of a MWCB halt, the Initial Display Only
Period is 15 minutes in length (as opposed to 5) to coincide with the
entire duration of the MWCB halt.\15\ In addition, such introductory
language is consistent with current rule language, with minor
revisions. The minor revisions include referencing a ``halt'' rather
than both a ``halt or pause'' for clarification and adding a specific
defined term of ``Initial Display Only Period'' for the 5-minute period
referenced. The types of halts covered by Rule 4120(c)(7) (i.e.,
trading halt initiated under Rule 4120(a)(1), (4), (5), (6), (9), (10),
(11) or (14)) remain unchanged.
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\13\ This covers trading halts related to dissemination of
material news for Nasdaq-listed securities (see Rule 4120(a)(1));
halts of Nasdaq-listed American Depository Receipts or other Nasdaq-
listed securities where underlying securities are halted by foreign
markets or regulators for regulatory reasons (see Rule 4120(a)(4));
halts related to Exchange requests from issuers relating to material
news, the issuer's ability to meet listing qualification
requirements, or other information necessary to protect investors
and the public interest (see Rule 4120(a)(5)); halts related to
extraordinary market activity (see Rule 4120(a)(6)); halts in
certain products where the Intraday Indicative Value or index value
is not disseminated as required (see Rule 4120(a)(9)); halts in
certain products where the net asset value is not being disseminated
to all market participants at the same time (see Rule 4120(a)(10));
halts related to large price moves for Nasdaq-listed securities not
covered by the LULD Plan (see Rule 4120(a)(11)), and halts related
to reverse stock splits (see Rule 4120(a)(14)). In 2023, 98% of
these aforementioned halts were news-related halts. The Exchange
focuses on these specific trading halts because these halts
currently not do have any price protection mechanism in place for
the reopening of securities following a halt.
\14\ See Rule 4120(c)(10).
\15\ See Rule 4121(d).
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Proposed Rule 4120(c)(7)(A) describes the Exchange's proposed
process for establishing the ``Auction Reference Price''. The Auction
Reference Price would mean: (a) the Nasdaq last sale price (either
round or odd lot); and (b) if there is no Nasdaq last sale price, the
prior trading day's Nasdaq Official Closing Price (``NOCP'').\16\ The
Exchange proposes to use the Nasdaq last sale price \17\ (or if none,
the NOCP) as this price is reflective of the current market for the
halted security. The Exchange proposes to use Nasdaq specific prices
rather than market-wide prices, consistent with MWCB, because of the
accessibility and controllability of the Exchange data. In rare
instances where there is no Nasdaq last sale price or NOCP, Nasdaq's
MarketWatch Department (``MarketWatch'') would have discretion to set
the Auction Reference Price.\18\ The Exchange proposes to set the
Auction Reference Price in a manner similar to that which is utilized
for MWCB halts, in which the Auction Reference Price is the Nasdaq last
sale price or if none, the NOCP.\19\ However, the Exchange believes it
is important to have a mechanism by which it may set a reference price
in rare situations where there is no Nasdaq last sale price or NOCP.
Similar to MWCB, the Exchange is not proposing to use the LULD Auction
Reference Price, which is based on the Price Band that triggered the
trading pause,\20\ as the Exchange believes that a different reference
is necessary for a reopening process that is unrelated to the LULD
mechanism. LULD and halt crosses use distinctly different reference
prices in the auction pricing methodology. The reference price in a
LULD auction in all cases will be either the pre-calculated upper or
lower LULD band value that was last disseminated. In contrast, the
reference price of a regulatory halt will use the prevailing last price
or designated price in the event there is no last price. The last
prevailing price is more representative of the current value of a
security, and as such, a better reference price to use for the halt
reopening auction methodology.\21\
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\16\ If there is no Nasdaq last sale price, the prior trading
day's NOCP is preferable for establishing the Auction Reference
Price. The NOCP, as opposed to the last sale price on another
exchange, serves as the next best reference price as it is derived
from the primary market center for the Nasdaq-listed securities.
\17\ The Nasdaq last sale price reflects the last sale price of
that trading session.
\18\ Although the proposal would allow for some discretion to
MarketWatch, the Exchange notes that such discretion is limited to
setting the Auction Reference Price in these rare instances, which
does not determine the ultimate price at which the security will
trade. In exercising such limited discretion in these rare
instances, MarketWatch would source the best estimation for the
Auction Reference Price from an external vendor.
\19\ See Rule 4121(d)(1)(A).
\20\ See Rule 4120(c)(10)(A)(i).
\21\ Further, LULD bands are published only during regular
trading hours 9:30a.m.-4:00p.m. which prevents it from being
considered as a refence price as halt auctions can occur at all
eligible trading hours 4:00a.m.-8:00p.m.
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Proposed Rule 4120(c)(7)(A) also describes the Exchange's proposed
process for determining the upper and lower ``Auction Collar'' prices.
For securities with an Auction Reference Price of greater than $1, the
lower Auction Collar price (which is rounded to the nearest minimum
price increment \22\) is derived by subtracting $1 or 10% of the
Auction Reference Price, whichever is greater, from the Auction
Reference Price. For securities with an Auction Reference Price of $1
or less, the lower Auction Collar price (which is rounded to the
nearest minimum price increment) is derived by subtracting $0.50 or 10%
of the Auction Reference Price, whichever is greater, from the Auction
Reference Price. For securities with an Auction Reference
[[Page 91856]]
Price of greater than $1, the upper Auction Collar price (which is
rounded to the nearest minimum price increment) is derived by adding $1
or 10% of the Auction Reference Price, whichever is greater, to the
Auction Reference Price. For securities with an Auction Reference Price
of $1 or less, the upper Auction Collar price (which is rounded to the
nearest minimum price increment) is derived by adding $0.50 or 10% of
the Auction Reference Price, whichever is greater, to the Auction
Reference Price. The proposed process for calculating the upper and
lower Auction Collars is similar to the process used to calculate MWCB
Auction Collars, where initial thresholds are applied on both sides of
the Auction Reference Price.\23\ In contrast, the initial price collar
thresholds used for the LULD mechanism are determined by the direction
of the trading that invoked the trading pause and the price of the LULD
Band in place at the time the trading pause was triggered.\24\ In this
case, because there would not be a security-specific pricing direction
reason for the halt, the Exchange believes that it is appropriate to
apply the initial thresholds on both sides of the Auction Reference
Price, as is currently done in the case of a MWCB halt. While the
specific price collar thresholds used for the LULD and MWCB mechanisms
are 5% of the Auction Reference Price, the proposed rule change would
provide price collar thresholds of 10% (and 20% in the event a security
enters a third period, as described below) of the Auction Reference
Price. These price collar thresholds are appropriate as they balance
the need for price protections with the desire to promote efficient
price discovery and minimize the length of the interruption from a
trading halt. The Exchange believes it is appropriate to set the price
collar thresholds at a higher percentage as compared to the price
collar thresholds used for the LULD and MWCB mechanisms because halts
under the proposal are more likely to have a significant price impact,
warranting wider collars to allow for price discovery to happen
quicker.\25\ While the LULD and MWCB mechanisms provide a price collar
threshold of $0.15 for securities with an Auction Reference Price of $3
or less,\26\ the Exchange proposes to include minimum threshold amounts
for calculating the price collars (i.e., $0.50 for securities with an
Auction Reference Price of $1 or less and $1 for securities with an
Auction Reference Price of greater than $1) to ensure that the Auction
Collars for lower-priced securities are wide enough to allow for
reopening and effective price discovery. This approach is reasonable
because lower priced stocks can have significant price movement which
warrants a greater minimum threshold in order to allow for efficient
price discovery and a more timely reopening.
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\22\ The term ``minimum price increment'' means $0.01 in the
case of a System Security priced at $1 or more per share, and
$0.0001 in the case of a System Security priced at less than $1 per
share. See Equity 1, Section 1(a)(13).
\23\ See Rule 4121(d)(1)(B).
\24\ See Rule 4120(c)(10)(A)(ii). In the LULD context, the
initial price collar thresholds are asymmetrically updated because
direction of the order imbalance (buyer/seller imbalances) are known
at the time of the pause. In the halt cross context, the direction
of the order imbalance (buyer/seller imbalances) is not known at the
time of the halt. Accordingly, the initial price collar thresholds
need to be applied symmetrically before arriving at the price at
which the security will trade.
\25\ For example, a news driven halt related to a drug
announcement may warrant a significant price movement in a short
period of time and a wider collar would allow the stock to reopen in
a reasonable period.
\26\ See Rule 4120(c)(10)(A)(ii); Rule 4121(d)(1)(B).
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Proposed Rule 4120(c)(7)(B) describes what would happen at the end
of the Initial Display Only Period, the circumstances when the Exchange
would extend the Display Only Period, and how the Exchange would adjust
the Auction Collars for an extension. At the conclusion of the Initial
Display Only Period, the security would be released for trading unless,
at the end of an Initial Display Only Period, Nasdaq detects an order
imbalance \27\ in the security. In that case, Nasdaq would extend the
Display Only Period for an additional 5-minute period (``Extended
Display Only Period''), and the Auction Collar prices would be adjusted
as follows: The new lower Auction Collar price is derived by
subtracting $1 or 10% of the initial Auction Reference Price, whichever
is greater, from the previous lower Auction Collar price for securities
with an Auction Reference Price of greater than $1 or $0.50 or 10% of
the initial Auction Reference Price, whichever is greater, from the
previous lower Auction Collar price for securities with an Auction
Reference price of $1 or less. The new upper Auction Collar price is
derived by adding $1 or 10% of the initial Auction Reference Price,
whichever is greater, to the previous upper Auction Collar price for
securities with an Auction Reference Price of greater than $1 or $0.50
or 10% of the initial Auction Reference Price, whichever is greater, to
the previous upper Auction Collar price for securities with an Auction
Reference price of $1 or less. The proposed process for initiating
extensions is similar to the process currently used for extending
trading pauses or halts under LULD \28\ and MWCB,\29\ with a couple
differences. First, the proposed minimum thresholds and percentages
used to calculate the Auction Collars during the Extended Display Only
Period are consistent with that of the Initial Display Only Period and
continue to differ from the LULD and MWCB mechanisms in that regard, as
discussed above. Second, the proposed process for calculating the upper
and lower Auction Collars during the Extended Display Only Period is
similar to the process used to calculate Auction Collars during the
Initial Display Only Period, where thresholds are applied on both sides
of the Auction Reference Price. In contrast, the price collar
thresholds used for the LULD and MWCB mechanisms are applied only in
the direction that caused extension of the Display Only Period.\30\ In
this case, the Exchange believes that it is appropriate to continue to
apply the thresholds on both sides of the Auction Reference Price to
accommodate price swings in either direction and to increase the
likelihood of resolving order imbalances.
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\27\ The definition of an order imbalance is described below and
included in proposed Rule 4120(c)(7)(E).
\28\ See Rule 4120(c)(10)(B).
\29\ See Rule 4121(d)(2).
\30\ See Rule 4120(c)(10)(B); Rule 4121(d)(2).
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Proposed Rule 4120(c)(7)(C) explains what would happen at the end
of the Extended Display Only Period. At the conclusion of the Extended
Display Only Period, the security would be released for trading unless,
at the end of the Extended Display Only Period, Nasdaq detects an order
imbalance in the security. In that case, Nasdaq would further extend
the Display Only Period for an additional 5-minute period (``Third
Period''), and the Auction Collar prices would be adjusted as follows:
The new lower Auction Collar price is derived by subtracting $1 or 20%
of the initial Auction Reference Price, whichever is greater, from the
previous lower Auction Collar price for securities with an Auction
Reference Price of greater than $1 or $0.50 or 20% of the initial
Auction Reference Price, whichever is greater, from the previous lower
Auction Collar price for securities with an Auction Reference price of
$1 or less. The new upper Auction Collar price is derived by adding $1
or 20% of the initial Auction Reference Price, whichever is greater, to
the previous upper Auction Collar price for securities with an Auction
Reference Price of greater than $1 or $0.50 or 20% of the initial
Auction Reference Price, whichever is greater, to the previous upper
Auction Collar price for securities with an Auction Reference price of
$1 or less. Nasdaq would release the
[[Page 91857]]
security for trading at the first point \31\ there is no order
imbalance.\32\ The Exchange believes it is appropriate to widen the
collars by 20% instead of 10% to the extent a security has not reopened
after the Extended Display Only Period because the order imbalance may
be indicative that a significant price movement in the security is
warranted based on the news announcement (or otherwise). If the
security has not been released for trading by the conclusion of the
Third Period, Nasdaq will continue to adjust the Auction Collar prices
every five minutes in the manner described in this Rule 4120(c)(7)(C)
until the security is released for trading. Other than the change in
the percentage by which the Exchange will widen the collars, the
process in proposed Rule 4120(c)(7)(C) is consistent with that of the
LULD and MWCB mechanisms.\33\
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\31\ The ``first point'' there is no order imbalance would occur
after the next NOII message dissemination.
\32\ Unlike the Initial Display Only Period and the Extended
Display Only Period, the security could be released for trading
prior to the end of the Third Period. For example, assume ABC
security enters a regulatory halt at 1:30 p.m. The last sale/
reference price is $100. The auction collars are $90 and $110. At
1:35 p.m., the calculated price at which the security would be
released for trading is $122. The display only period is extended
until 1:40. The new auction collars are $80 and $120. At 1:40 p.m.,
the calculated price at which the security would be release for
trading is still $122. The Third Period commences at 1:40 p.m. The
new auction collars are $60 and $140. At 1:40:01 p.m., the system
detects that there is no longer an Order Imbalance so the Halt Cross
commences and the security is released for trading.
\33\ See Rule 4120(c)(10)(C); Rule 4121(d)(3).
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Proposed Rule 4120(c)(7)(D) explains that, notwithstanding Rule
4120(c)(7)(A)-(C), a trading halt that exists at or after 3:50 p.m.\34\
in a stock shall reopen via a Hybrid Closing Cross pursuant to Rule
4754(b)(7). As described in more detail below, the Hybrid Closing Cross
would provide an alternative process for executing closing trades on
the Exchange. Proposed Rule 4120(c)(7)(D) is consistent with the LULD
mechanism, where a stock reopens via a LULD Closing Cross where a
trading pause exists at or after 3:50 p.m.\35\
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\34\ All times referenced in this filing are Eastern Time.
\35\ See Rule 4120(c)(10)(D).
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Proposed Rule 4120(c)(7)(E) explains when an order imbalance
exists. Specifically, it provides that, for purposes of Rule
4120(c)(7), upon completion of the cross calculation an order imbalance
shall be established as follows: the calculated price at which the
security would be released for trading is above (below) the upper
(lower) Auction Collar price; or (ii) all market orders would not be
executed in the cross. This is the same manner in which an order
imbalance is established under the current reopening process for
trading pauses and MWCB halts.\36\
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\36\ See Rule 4120(c)(10)(E); Rule 4121(d)(4).
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Proposed Rule 4120(c)(7)(F) provides that, if the Exchange is
unable to reopen trading due to a systems or technology issue, it shall
notify the securities information processor immediately. This is
consistent with the Exchange's notification process for LULD.\37\
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\37\ See Rule 4120(a)(12)(G).
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In sum, the proposed changes to Rule 4120(c)(7) would establish a
price protection mechanism for the halt cross process for securities
halted under the provisions noted above.\38\ The proposed price
protection mechanism is similar to what is currently utilized for
reopening stocks following a LULD trading pause or MWCB halt. Price
collars would be built into the halt cross process and if the price
falls outside of those collars after an initial 5-minute display only
period, the collars would be widened by the same threshold amount as
the initial collars and a subsequent 5-minute display only period would
commence. If the price falls outside of those collars after the second
5-minute display only period, the collars would be widened by a wider
amount and a subsequent, third period would commence. This process
would continue until the price falls within the set thresholds, after
which the auction would execute and the stock would reopen for trading.
Customers would benefit from having the new price collar protections in
place as it would ensure that executions received during the halt cross
process are filled at prices that reflect the true market for the
security. Allowing additional time for improved price discovery could
increase market participation, improving liquidity and helping reduce
price volatility.
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\38\ Supra note 13.
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Proposed Changes to Rule 4702 (Order Types)
The Exchange proposes to amend Rule 4702 by deleting references to
the LULD Closing Cross from Rule 4702(b)(12) (Limit on Close (LOC)
Orders) and Rule 4702(b)(17) (Extended Trading Close (ETC) Orders). The
Exchange believes that the LULD Closing Cross \39\ as well as the
proposed Hybrid Closing Cross \40\ should be included in the definition
of the Nasdaq Closing Cross because the LULD Closing Cross and the
Hybrid Closing Cross are alternative processes for executing closing
trades on the Exchange and therefore do not need to be specifically
referenced in the Rules where the Nasdaq Closing Cross is already
referenced, thereby simplifying the rule language. For clarification,
the Exchange also proposes to specify that the Nasdaq Closing Cross
includes the LULD Closing Cross and Hybrid Closing Cross in the
definition of the Nasdaq Closing Cross in Rule 4754(a)(6), as described
below.
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\39\ 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. See Rule 4754(b)(6).
\40\ As described below, the Exchange proposes to establish the
Hybrid Closing Cross in Rule 4754(b)(7). The Hybrid Closing Cross
would be the Exchange's auction process for executing closing trades
in Nasdaq-listed securities when a trading halt pursuant to Rules
4120(a)(1), (4), (5), (6), (9), (10), (11), or (14) exists at or
after 3:50 p.m. and before 4:00 p.m.
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Proposed Changes to Rule 4753 (Nasdaq Halt Cross)
First, the Exchange proposes to clarify that Auction Reference
Prices and Auction Collars are not included in the Order Imbalance
Indicator, but instead are disseminated in a separate message. For
purposes of LULD and MWCB, the Rules incorrectly state that the Auction
Reference Prices and Auction Collars are included in the Order
Imbalance Indicator and the Exchange proposes to correct such
inaccuracies by modifying Section (F) and (G) in Rule 4753(a)(3)
accordingly.
The Exchange also proposes to add section (H) in Rule 4753(a)(3).
This section (H) would provide that, for purposes of a trading halt
initiated under Rule 4120(a)(1), (4), (5), (6), (9), (10), (11) or
(14), the Exchange will disseminate a separate message with Auction
Reference Prices and Auction Collars, as defined in Rule
4120(c)(7)(A).\41\ This is consistent with dissemination of Auction
Reference Prices and Auction Collars for purposes of LULD pauses and
MWCB halts.
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\41\ Dissemination will take place on Nasdaq's proprietary feed,
Nasdaq TotalView-ITCH. As is the case with MWCB halts and to be
consistent with current Exchange processes, the Exchange will not
send auction information to the SIP, including price collars and the
number of extensions. While auction information for LULD pauses is
disseminated to the SIP per plan requirements, the Exchange does not
disseminate auction information to the SIP for other halts.
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Rule 4753(e) currently states that any IOC Order for a halted
security that is entered prior to the Nasdaq Closing Cross and for
which the halt remains in effect at the commencement of the Nasdaq
Closing Cross, shall be cancelled immediately after the Nasdaq Closing
Cross. With the introduction of the Hybrid Closing Cross, as described
further below, if the quoting period has
[[Page 91858]]
commenced at any time prior to 4 p.m. IOC orders for halted securities
would execute in the Hybrid Closing Cross. Similarly, IOC orders could
also execute in the LULD Closing Cross. Therefore, the Exchange
proposes to clarify, in Rule 4753(e), that any IOC Order for a halted
security that is entered prior to the Nasdaq Closing Cross and for
which the halt remains in effect at the commencement of the Nasdaq
Closing Cross, shall either execute in the Nasdaq Closing Cross or be
cancelled immediately after the Nasdaq Closing Cross.
Proposed Changes to Rule 4754 (Nasdaq Closing Cross)
First, the Exchange proposes to amend the definition of ``Nasdaq
Closing Cross'' in Rule 4754(a)(6). As noted above, the Exchange
believes that the LULD Closing Cross and Hybrid Closing Cross should be
included in the definition of Nasdaq Closing Cross because they are
types of closing crosses. The Exchange therefore proposes to clarify
that the Nasdaq Closing Cross shall include the LULD Closing Cross and
the Hybrid Closing Cross in Rule 4754(a)(6). Such change would allow
the Exchange to simplify its rule language and prevent the Exchange
from needing to list the LULD Closing Cross and Hybrid Closing Cross
where the Nasdaq Closing Cross is referenced in the Rules.
Second, the Exchange proposes to add ``NOII'' as an alternative
defined term for ``Order Imbalance Indicator'' in Rule 4754(a)(7). NOII
is currently referenced in the Rules and the Exchange proposes to add
references to NOII in the proposed rule change; however, NOII is not
currently defined in the Rules. The Exchange is not proposing to make
any substantive changes to the meaning of NOII or Order Imbalance
Indicator. Rather, the Exchange wishes to provide clarity regarding the
definition of NOII.
Third, the Exchange proposes to add ``EOII'' as an alternative
defined term for ``Early Order Imbalance Indicator'' in Rule
4754(a)(10). EOII is currently referenced in the Rules and the Exchange
proposes to add references to EOII in the proposed rule change;
however, EOII is not currently defined in the Rules. The Exchange is
not proposing to make any substantive changes to the meaning of EOII or
Early Order Imbalance Indicator. Rather, the Exchange wishes to provide
clarity regarding the definition of EOII.
Fourth, the Exchange proposes to make two changes to Rule
4754(b)(6), which relates to the LULD Closing Cross Following Limit-Up-
Limit-Down Trading Pause. In part, Rule 4754(b)(6)(F)(ii) sets forth
Rules as to how the Exchange would handle LOC Orders entered between
3:55 p.m. and immediately prior to 3:58 p.m. The Exchange wishes to
make a clarifying change to specify that the relevant timeframe is
after the NOII immediately following 3:55 p.m. and immediately prior to
3:58 p.m. In other words, instead of stating ``between 3:55 p.m. ET and
immediately prior to 3:58 p.m. ET,'' the Exchange proposes to state,
``after the NOII immediately following 3:55 p.m. ET and immediately
prior to 3:58 p.m. ET'' to ensure the Rule is precise. In addition, the
Exchange wishes to modify in Rule 4754(b)(6)(G) that orders
participating in the LULD Closing Cross shall be executed in price/
display/time priority rather than just price/time priority as the
current rule language states. This modification would be consistent
with how the Exchange generally assigns priority with the execution of
Displayed Orders and interest before Non-Displayed Orders.
Specifically, Rule 4754(b)(3)(B) prescribes that, in the Closing Cross,
the Exchange prioritizes as a group the execution of Displayed Orders
and interest, with price as the primary priority, and then within each
price level, with time as the secondary priority.\42\ Accordingly, the
Exchange proposes to update the rule to reflect this current behavior,
whereby displayed orders are executed ahead of hidden orders. Such
change would provide more specificity in the Rule for accuracy.
---------------------------------------------------------------------------
\42\ See Rule 4754(b)(3)(B); see also Securities Exchange Act
Release No. 34-97973 (July 25, 2023), 88 FR 49522 (July 31, 2023)
(Notice of Filing and Immediate Effectiveness of File No. SR-NASDAQ-
2023-024 to Amend Equity 4, Rules 4752, 4753, and 4754).
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Lastly, in proposed Rule 4754(b)(7), the Exchange proposes to adopt
a modified closing cross (defined as the ``Hybrid Closing Cross'') that
the Exchange would conduct for Nasdaq-listed securities when a trading
halt pursuant to Rule 4120(a)(1), (4), (5), (6), (9), (10), (11) or
(14) exists at or after 3:50 p.m. and before 4:00 p.m.\43\ Today, the
Exchange has not needed to handle a halt reopening auction at or after
3:50 p.m. and before 4:00 p.m. due to the current policy of MarketWatch
not scheduling any reopening of a security past 3:30 p.m. The Exchange
in practice does not want to negatively impact the price discovery
process because of the possibility of a conflict between a halt cross
reopening and the official closing cross in the closing minutes of the
trading day. Under the Exchange's halt cross protection proposal,
however, and its advent of collars and extensions, it is possible for a
stock to be scheduled for reopening well ahead of the 4:00 p.m. close
and have its quoting period extended multiple times past 3:50 p.m. due
to its reference price falling outside of the established collars. As
such, our proposed Hybrid Closing Cross process eliminates the
possibility of a conflicting cross and allows the Exchange to ensure
that it can establish an efficient price discovery process for the
closing price upon the market close at 4:00 p.m. The Hybrid Closing
Cross provides an alternative process for executing closing trades on
Nasdaq for when certain trading halts \44\ exist at or after 3:50 p.m.
and before 4:00 p.m. (if the Display Only Period has begun for a halted
security). The Exchange believes that the price protections for the
LULD Closing Cross have been effective at facilitating price discovery
and ensuring that the closing price of a security is reasonably based
on current market conditions in the security, and therefore proposes to
adopt similar price protections for its Hybrid Closing Cross.
---------------------------------------------------------------------------
\43\ In contrast, today, such halts would typically not be
scheduled to resume trading during such period, avoiding
interference with the closing cross.
\44\ See supra note 13.
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Under the proposal, a halted security would only be eligible to
resume trading via the Hybrid Closing Cross after the Display Only
Period begins.\45\ The Exchange proposes to define ``Auction Reference
Price'', ``Eligible Interest'', and ``Imbalance'' in Rule 4754(b)(7)(A)
for purposes of Rule 4754(b)(7). ``Auction Reference Price'' would have
the same meaning as defined in Rule 4120(c)(7)(A), discussed above.
``Eligible Interest'' would have the same meaning as ``Close Eligible
Interest'' in Rule 4754(a),\46\ with the addition of any new orders
with an eligible underlying Order Type and Attribute, entered during
the trading halt. ``Imbalance'' would mean the number of shares of buy
or sell Market on Close (``MOC''),\47\ LOC Orders, or Eligible Interest
that cannot
[[Page 91859]]
be matched with other MOC, LOC, or Imbalance Only (``IO'') Order shares
or Eligible Interest at a particular price at any given time. These
proposed definitions are consistent with the definitions of Eligible
Interest and Imbalance used for purposes of the LULD Closing Cross.\48\
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\45\ A halted stock that has not entered the Display Only Period
at or after 3:50 and before 4:00 p.m. would not participate in the
Hybrid Closing Cross and would remain halted.
\46\ ``Close Eligible Interest'' means any quotation or any
order that may be entered into the system and designated with a
time-in-force of SDAY, SGTC, MDAY, MGTC, SHEX, or GTMC. The System
will delay processing any full cancellation request for Close
Eligible Interest made during the Nasdaq Closing Cross until such
time as the Nasdaq Closing Cross concludes, except for securities in
a halt or pause. During a halt or pause, the System will process any
full or partial cancellation request for Close Eligible Interest
made for such halted or paused security during the Nasdaq Closing
Cross. See Rule 4754(a)(1).
\47\ A ``Market On Close Order'' or ``MOC Order'' is an Order
Type entered without a price that may be executed only during the
Nasdaq Closing Cross. See Rule 4702(b)(11).
\48\ See Rule 4754(b)(6)(A).
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In proposed Rule 4754(b)(7)(B), the Exchange proposes to specify
the timing of the Hybrid Closing Cross and After Hours Trading, as well
as what happens if there is insufficient trading in the System to
execute a Hybrid Closing Cross. For trading halts existing at or after
3:50 and before 4:00 p.m., the Hybrid Closing Cross would occur at 4:00
p.m. After Hours Trading would commence after the Hybrid Closing Cross
executes. If there is insufficient trading interest in the Nasdaq
system to execute a Hybrid Closing Cross, Nasdaq would not conduct a
cross in that security and would instead use the last sale on Nasdaq as
the NOCP in that security for that trading day. After Hours Trading
would commence after Nasdaq publishes the NOCP. Such procedures are
consistent with that of the LULD Closing Cross.\49\
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\49\ See Rule 4754(b)(6)(B).
---------------------------------------------------------------------------
Proposed Rule 4754(b)(7)(C) provides information about
dissemination of the EOII \50\ and NOII \51\ and about the price at
which the Hybrid Closing Cross would execute. Specifically, Nasdaq
proposes to continue disseminating the EOII and the NOII pursuant to
Rule 4754(b)(1) until After Hours Trading begins. The Near Clearing
Price \52\ and Reference Prices contained in the EOII and the NOII, as
applicable, would represent the price at which the Hybrid Closing Cross
would execute should the cross conclude at that time, bounded by the
Threshold Prices (defined below), and the Far Clearing Price \53\ would
represent the price at which the Hybrid Closing Cross would execute
should the cross conclude at that time, if it were not bounded by the
Threshold Prices (defined below). Such procedures are similar to that
of the LULD Closing Cross.\54\
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\50\ See Rule 4754(a)(10).
\51\ See Rule 4754(a)(7).
\52\ See Rule 4754(a)(7)(E)(ii).
\53\ See Rule 4754(a)(7)(E)(i).
\54\ See Rule 4754(b)(6)(C).
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Proposed Rule 4754(b)(7)(D) would specify that the Hybrid Closing
Cross would occur at the price within the threshold prices established
pursuant to Rule 4754(b)(7)(E) (``Threshold Prices'') that maximizes
the number of shares of Eligible Interest, MOC, LOC, and IO \55\ Orders
in the Nasdaq Market Center to be executed. If more than one price
exists, the Hybrid Closing Cross would occur at the price within the
Threshold Prices that minimizes any Imbalance. If more than one price
still exists, the Hybrid Closing Cross would occur at the entered price
\56\ within the Threshold Prices at which shares will remain unexecuted
in the cross. If there is no price within the Threshold Prices that
satisfies the above conditions, then the Hybrid Closing Cross would
occur at: (a) if an Imbalance exists, a price equal to the upper
(lower) Threshold Price for a buy (sell) Imbalance; or (b) if no
Imbalance exists, a price equal to the Auction Reference Price. The
proposed tiebreakers in Rule 4754(b)(7)(D) are consistent with the
tiebreakers used for determining the LULD Closing Cross price with one
exception.\57\ Specifically, if there is no price within the Threshold
Prices that satisfies the conditions mentioned above and no Imbalance
exists, the Hybrid Closing Cross would occur at a price equal to the
Auction Reference Price \58\ whereas the LULD Closing Cross occurs at a
price that minimizes the distance from the last published Upper Band
(Lower Band) for a Limit Up (Limit Down) Trading Pause.\59\ Such
difference reflects the need for a price that is unrelated to the LULD
mechanism in the case of the Hybrid Closing Cross given there would not
be a security-specific pricing direction reason for the halt (or LULD
Bands).
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\55\ An ``Imbalance Only Order'' or ``IO Order'' is an Order
entered with a price that may be executed only in the Nasdaq Closing
Cross and only against MOC Orders or LOC Orders. See Rule
4702(b)(13).
\56\ The ``entered price'' refers to the price of the cross
eligible order interest at which shares would remain unexecuted in
the Hybrid Closing Cross.
\57\ See Rule 4754(b)(6)(D).
\58\ See Rule 4754(b)(7)(A)(i).
\59\ See Rule 4754(b)(6)(D)(iv)(b).
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The Exchange proposes to introduce price protections to the Hybrid
Closing Cross that are similar to the protections used today for the
LULD Closing Cross and will ensure that the Hybrid Closing Cross price
is reasonably related to current market conditions. Proposed Rule
4754(b)(7)(E) would describe the Threshold Prices within which the
Hybrid Closing Cross price must fall. The upper (lower) Threshold Price
would be established by adding (subtracting) $1 or a certain percentage
of the initial Auction Reference Price, whichever is greater, to the
upper (or from the lower) Auction Collar price that was last
disseminated pursuant to 4120(c)(7)(A)(ii) for securities with an
Auction Reference Price of greater than $1. The upper (lower) Threshold
Price would be established by adding (subtracting) $0.50 or a certain
percentage of the initial Auction Reference Price, whichever is
greater, to the upper (or from the lower) Auction Collar price that was
last disseminated pursuant to 4120(c)(7)(A)(ii) for securities with an
Auction Reference price of $1 or less. Nasdaq management would set and
modify the thresholds from time to time upon prior notice to market
participants. This is similar to the discretion provided to Nasdaq
management in connection with the opening cross, closing cross, and
LULD Closing Cross, where Nasdaq management has discretion to set and
modify thresholds used in determining the Benchmark Prices.\60\
Although the proposed price protections are similar in nature to those
used for the LULD Closing Cross, the process for calculating the
Benchmark Prices for the LULD Closing Cross is distinct because it
involves widening the Auction Collar (or Band) on only one side,\61\
while the proposed process would widen the Auction Reference Price on
both sides for the Hybrid Closing Cross. In this case, because there
would not be a security-specific pricing direction reason for the halt,
the Exchange believes that it is appropriate to apply the thresholds on
both sides of the Auction Reference Price.
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\60\ See Rule 4752(d)(2)(E)(Opening Cross); Rule
4754(b)(2)(E)(Closing Cross); Rule 4754(b)(6)(E)(LULD Closing
Cross).
\61\ Rule 4754(b)(6)(E)(LULD Closing Cross).
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Proposed Rule 4754(b)(7)(F) sets forth the orders that would be
eligible to participate in the Hybrid Closing Cross, including all
orders entered into the system and placed on the continuous book prior
to the trading halt. Such orders may be modified or cancelled up until
the time of the Hybrid Closing Cross. During the halt and prior to 4:00
p.m., new orders may be entered, modified, and cancelled and may
participate in the Hybrid Closing Cross. MOC, LOC and IO Orders may be
entered, modified, and cancelled pursuant to Rules 4702(b)(11),
4702(b)(12), and 4702(b)(13).\62\ If the security entered a trading
halt prior and up to 3:50 p.m., the System would not accept late LOC
Orders.\63\ For purposes
[[Page 91860]]
of Hybrid Closing Cross price selection, buy (sell) IO orders are re-
priced to one minimum price increment below (above) the initial Auction
Reference Price. Such rules are consistent with the LULD mechanism,\64\
except that the proposed rules do not include certain inapplicable
language from the LULD Closing Cross processes.\65\
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\62\ Though other order types are also applicable, the Exchange
calls out MOC, LOC and IO Orders to make it clear that, for these
order types, there may be exceptions to the general rule that
``During the halt and prior to 4:00 p.m., new orders may be entered,
modified, and cancelled and may participate in the Hybrid Closing
Cross.'' As such, the Exchange proposes to make it clear that Rules
4702(b)(11), 4702(b)(12), and 4702(b)(13) prevail.
\63\ The System would not accept late LOC orders in this
scenario because if a security entered a trading halt prior and up
to 3:50 p.m. ET, there would be no relevant reference prices, upon
which such orders depend.
\64\ See Rule 4754(b)(6)(F).
\65\ Trading halts subject to the Hybrid Closing Cross would not
be entered between 3:50 and 4 p.m. and therefore certain procedures
included in the LULD Closing Cross Rules are inapplicable to the
Hybrid Closing Cross. See, e.g., Rule 4754(b)(6)(F)(ii)(b)-(c).
---------------------------------------------------------------------------
Proposed Rule 4754(b)(7)(G) provides that orders participating in
the Hybrid Closing Cross would be executed in price/display/time
priority order and for purposes of determining priority, eligible IO
orders would be priced to the closing price and executed in time
priority with other orders at that price. This clarification would be
consistent with how the Exchange generally assigns priority with the
execution of Displayed Orders and interest before Non-Displayed Orders.
In addition, Proposed Rule 4754(b)(7)(G) provides that any order not
executed in the Hybrid Closing Cross would be processed according to
the entering firm's instructions. This is consistent with how orders
execute in the LULD Closing Cross.\66\
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\66\ See Rule 4754(b)(6)(G).
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Finally, the Exchange would renumber current Rule 4754(b)(7) as
Rule 4754(b)(8) and update a related reference in such Rule.
Proposed Changes to Rule 4755 (Extended Trading Close)
Similar to the revisions made to Rule 4702 (Order Types), the
Exchange proposes to delete references to the LULD Closing Cross from
Rule 4755 because the Exchange proposes to include the LULD Closing
Cross and the Hybrid Closing Cross in the definition of the Nasdaq
Closing Cross, thereby making the specific references to the LULD
Closing Cross in Rule 4755 unnecessary.
Implementation
The Exchange will issue an Equities Trader Alert not less than 7
days prior to implementing the proposed changes.
On February 22, 2022, the Exchange submitted a proposal to amend
its Rules related to halts (``Halts Proposal'') for the purpose of
implementing UTP Plan amendments and establishing common criteria and
procedures for halting and resuming trading in equity securities in the
event of regulatory or operational issues.\67\ The Halts Proposal was
approved on June 8, 2022.\68\ The Exchange intends to implement the
Halts Proposal in conjunction with other SROs. Because the Exchange
continues to await an industry-wide implementation and wishes to
implement the proposed enhancements to its halt cross process in the
meantime, the Exchange intends to file a proposed rule change in the
future in order to incorporate the changes herein with those changes in
the Halts Proposal. As such, the proposed rule changes described herein
reflect changes to the Exchange's currently operative rule language.
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\67\ See Securities Exchange Act Release No. 94370 (March 7,
2022), 87 FR 14071 (March 11, 2022). Nasdaq filed an amendment to
the proposal on April 29, 2022. See Securities Exchange Act Release
No. 94838 (May 3, 2022), 87 FR 27683 (May 9, 2022).
\68\ See Securities Exchange Act Release No. 95069 (June 8,
2022), 87 FR 36018 (June 14, 2022).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\69\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\70\ 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.
---------------------------------------------------------------------------
\69\ 15 U.S.C. 78f(b).
\70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is consistent
with the Act because it would amend the halt auction process following
certain trading halts \71\ to be more closely aligned with the process
currently implemented for halt auctions following a trading pause under
the LULD Plan and the process for halt auctions following a MWCB halt.
The current reopening process following a trading pause and following a
MWCB halt have been generally successful in facilitating a fair and
orderly process for reopening securities. The Exchange has therefore
decided to propose a similar process for halt auctions following other
types of halts, as specified above. The Exchange believes that its
proposal would benefit investors by facilitating price discovery and
promoting more consistency in how the Exchange conducts the reopening
process following trading halts and pauses. While auctions cannot
prevent price volatility, auctions should facilitate ongoing trading
and afford market participants with ample time to participate in the
auction price discovery process. Accordingly, this proposal balances
transparency and timeliness to ensure efficient price discovery.
Furthermore, because there are no price protection mechanisms specific
to the halt cross process today, the Exchange believes that there is
little risk \72\ in adopting the proposal.
---------------------------------------------------------------------------
\71\ See supra note 13.
\72\ There is a risk of a delayed reopening if the price of the
halted security is fluctuating.
---------------------------------------------------------------------------
While the proposed reopening process would largely follow the
reopening process in place today for trading pauses under the LULD Plan
and/or MWCB halts, there would be several differences. These
differences are primarily designed to ensure that suitable Auction
Collars are utilized for the reopening process. The Exchange proposes
to use the Nasdaq last sale price (or if none, the NOCP) as the Auction
Reference Price, similar to the Auction Reference Price under a MWCB
halt.\73\ However, the Exchange also proposes to provide MarketWatch
authority to set an Auction Reference Price in rare situations where
there is no Nasdaq last sale price or NOCP.\74\ In addition, the
Exchange believes that it is appropriate to calculate both upper and
lower Auction Collars that are a specified percentage or dollar amount
from the reference price because the halts covered in the proposal do
not involve security specific buy or sell pressure. With extensions,
the Exchange also believes that it is appropriate to widen the collars
on both sides to accommodate price swings in either direction and to
increase the likelihood of resolving order imbalances. The proposal
would utilize price collar thresholds of 10% (and 20% after the first
two display only periods) of the Auction Reference Price, as compared
to price collar thresholds of 5% of the Auction Reference Price used
for the LULD and MWCB mechanisms, to ensure that the parameters are
appropriately set to ensure securities are priced within a reasonable
range of their halted price but are also not so restrictive as to
prevent effective price discovery. These price collar thresholds are
appropriate as they balance the need for price protections with the
desire to promote efficient price discovery and minimize the length of
the interruption from a trading halt. Finally, the Exchange proposes to
include minimum threshold amounts for calculating the price collars
(i.e., $0.50 for securities with an Auction Reference Price of $1 or
less and $1 for securities with an Auction Reference Price of greater
than $1) to ensure that the Auction Collars
[[Page 91861]]
for lower-priced securities are wide enough to allow for reopening and
effective price discovery. This approach is reasonable because lower
priced stocks can have significant price movement which warrants a
greater minimum threshold in order to allow for efficient price
discovery and a more timely reopening.
---------------------------------------------------------------------------
\73\ Supra note 16.
\74\ Supra note 18.
---------------------------------------------------------------------------
Otherwise, the proposed reopening process is consistent with the
current LULD and/or MWCB reopening process. Similar to the current LULD
and MWCB reopening process, the Exchange also believes that the
proposed process is consistent with the protection of investors and the
public interest because they are designed to facilitate price discovery
by ensuring that all market order interest could be satisfied in the
auction process. Furthermore, the Exchange believes that the
standardized procedures to extend halt auctions an additional five
minutes are appropriate because this would provide additional time to
attract offsetting liquidity. If at the end of such extension, market
orders still cannot be satisfied within the applicable collars, or if
the reopening price would be outside of the applicable collars, the
Exchange would extend the halt auction process an additional five
minutes. The Exchange believes that extending the auction in these
circumstances would protect investors and the public interest by
reducing the potential for significant price disparity in post-auction
trading.
The Exchange also believes that its proposal to establish a Hybrid
Closing Cross and implement price protections for the Hybrid Closing
Cross that are similar to the protections used today for the LULD
Closing Cross would promote just and equitable principles of trade. For
purposes of the LULD Closing Cross, the Exchange currently calculates
and applies a price threshold to a benchmark value that, when applied
to an individual security, determines the price threshold range within
which the security must execute in the LULD Closing Cross. The Exchange
believes that this mechanism has been effective in facilitating a fair
and orderly price discovery process at the close and ensuring that the
cross price derived does not exceed a price reasonably tied to the
prevailing market at the time. The Exchange has therefore determined to
adopt a Hybrid Closing Cross and apply similar protections to such
Hybrid Closing Cross. The Exchange believes that its proposal would
facilitate a fair and orderly close. Additionally, the Exchange
believes that the proposed rule change would benefit investors by
harmonizing the Exchange's LULD and Hybrid Closing Cross processes,
thereby promoting a more consistent experience for members and
investors and reducing any potential confusion regarding Nasdaq's
closing processes.
While the proposed price protections for the Hybrid Closing Cross
will largely follow the current implementation of the protections in
place today for the LULD Closing Cross, there are certain differences.
The differences are designed to account for inherent differences
between LULD pauses and other trading halts and ensure that the
proposed price protections are reasonably based on market conditions.
One of the proposed tiebreakers in Rule 4754(b)(7)(D) references the
Auction Reference Price whereas the LULD Closing Cross rule instead
refers to a price that minimizes the distance from the last published
Upper Band (Lower Band) for a Limit Up (Limit Down) Trading Pause. Such
difference reflects the need for a price that is unrelated to the LULD
mechanism in the case of the Hybrid Closing Cross given there would not
be a security-specific pricing direction reason for the halt (or LULD
Bands). Similarly, the process for calculating the Benchmark Prices for
the LULD Closing Cross is distinct because it involves widening the
Auction Collar (or Band) on only one side, while the proposed process
would widen the Auction Reference Price on both sides for the Hybrid
Closing Cross. In this case, because there would not be a security-
specific pricing direction reason for the halt, the Exchange believes
that it is appropriate to apply the thresholds on both sides of the
Auction Reference Price. Finally, certain language from the LULD
Closing Cross is omitted where it is inapplicable to the Hybrid Closing
Cross.\75\
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\75\ See supra note 65.
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Finally, the Exchange also believes it is appropriate to make
clarifying changes in Equity 4 to remove references to the LULD Closing
Cross in Rule 4702 and Rule 4755, clarify how Auction Reference Prices
and Auction Collars are disseminated in Rule 4753(a)(3), add an
exception regarding cancellation of IOC Orders for halted securities in
Rule 4753(e), specify that the Nasdaq Closing Cross shall include the
LULD Closing Cross and the Hybrid Closing Cross in Rule 4754(a)(6), add
``NOII'' as an alternative defined term for ``Order Imbalance
Indicator'' in Rule 4754(a)(7), add ``EOII'' as an alternative defined
term for ``Early Order Imbalance Indicator'' in Rule 4754(a)(10), amend
language related to handling of late LOC Orders in Rule 4754(b)(6), and
modify the priority for orders participating in the LULD Closing Cross
in Rule 4754(b)(6). The proposed changes would increase clarity and
transparency in the Rules, consistent with the public interest and the
protection of investors.
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 that the
proposed rule change is not designed to address any competitive issues,
but rather, is designed to provide a measured and transparent process
for reopening Nasdaq listed securities after certain trading halts. The
proposed rule change is similar to the current reopening process
following a trading pause initiated under the LULD Plan, the process
following a MWCB halt, and processes implemented on other exchanges for
non-LULD regulatory halts. In addition, the proposed rule change is
also designed to establish a Hybrid Closing Cross that aligns with the
Exchange's LULD Closing Cross to provide for a transparent auction
process for executing member interest at the close and promote a more
consistent experience for members and investors.
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 (i) as the Commission may
designate up to 90 days of such date 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:
[[Page 91862]]
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#bbc9ced7de96d8d4d6d6ded5cfc8fbc8ded895dcd4cd"><span class="__cf_email__" data-cfemail="b0c2c5dcd59dd3dfddddd5dec4c3f0c3d5d39ed7dfc6">[email protected]</span></a>. Please include
file number SR-NASDAQ-2024-065 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-2024-065. 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-2024-065 and should
be submitted on or before December 11, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
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\76\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-27019 Filed 11-19-24; 8:45 am]
BILLING CODE 8011-01-P
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