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Notice

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify NASDAQ's DOT, DOTI, and LIST Routing Strategies

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Start Preamble March 25, 2014.

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 March 11, 2014, 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

NASDAQ proposes to modify Rule 4758 with respect to its DOT, DOTI, and LIST routing strategies. The text of the proposed rule change is available on the Exchange's Web site at http://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change

1. Purpose

NASDAQ offers its members optional routing functionality that allows them to use NASDAQ's facilities to access liquidity available on other trading venues. The functionality includes a range of defined routing algorithms—known as strategies—that determine the destinations and pattern of routing. The particular pattern of routing to other venues associated with a particular strategy is referred to in Rule 4758 as the “System routing table” for that strategy. All routing is designed to be conducted in a manner consistent with the requirements of Regulation NMS.

NASDAQ currently offers a set of strategies designed to allow market participants to route orders to the primary market on which a security is listed. NASDAQ is proposing minor changes to these strategies to improve their functioning and the clarity of the rule that describes them in certain situations. First, NASDAQ offers the DOT strategy (which includes several variations) as a means of designating an order for routing to the New York Stock Exchange (“NYSE”) or NYSE MKT [3] for participation in their respective opening or closing processes. DOT orders are routed directly to NYSE or NYSE MKT, as appropriate. After attempting to execute in the opening or closing process, if any shares remain unexecuted, DOT orders thereafter check the NASDAQ Market Center System for available shares and are converted into SCAN or STGY orders, depending on the designation of the entering firm.[4]

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NASDAQ is proposing to modify the language of the rule to make it clear that a DOT order may be designated to participate in the opening only or in the closing only (as provided by the specifications of the destination market) or to remain in force after the opening or closing, as applicable. An order entered before the open (or close) that is designated as opening only (or closing only) will likely be cancelled by the destination market after the open (or close) in accordance with its terms and therefore will not return to NASDAQ, even if not executed in full. Similarly, if NASDAQ receives a DOT order after the security has opened (or closed) and the order has been designated to participate in the opening only (or closing only), the order will nevertheless be routed to NYSE or NYSE MKT (which would be expected to reject the order based on its designation as opening only or closing only).[5] NASDAQ is also proposing to add language to the rule to make it clear that the conversion of DOT orders into SCAN or STGY orders applies only if the orders are not designated opening or closing only and are not fully executed, rejected, or cancelled by the market to which they are routed. NASDAQ is also modifying a sentence describing the treatment of DOT orders entered after 9:30 a.m. (i.e., orders that are intended to participate in the opening but that are entered after the opening); such orders are not routed to NYSE or NYSE MKT, but rather are immediately converted to SCAN or STGY orders. The modifications make it clear that this processing logic would be applied to an order that is intended to participate in the close but that is entered after the close. The modifications also make it clear that the processing logic would not be applied if the order was designated as opening only or closing only, since, as described above, the order would be routed and would be expected to be rejected. Finally, NASDAQ is modifying the rule to provide that DOT orders that are designated to participate in an opening process and that are received by NASDAQ before the destination market can receive them will be held until such time as the destination market can receive them. Currently, such orders are routed to the destination market and may be rejected.

NASDAQ is proposing similar changes to the DOTI routing strategy. DOTI is a routing option for orders that the entering firm wishes to direct to the NYSE or NYSE MKT without them returning to the Nasdaq Market Center. DOTI orders check the System for available shares and then are sent to destinations on the System routing table before being sent to NYSE or NYSE MKT, as appropriate. Alternatively, the member entering the order may opt to have it check the System and then be sent directly to NYSE or NYSE MKT, without routing to destinations on the System routing table.[6] DOTI orders do not return to the Nasdaq Market Center book after routing.

As is the case with DOT, NASDAQ is modifying the language of the rule to make it clear that a DOTI order may be designated to participate in the opening only or in the closing only (as provided by the specifications of the destination market) or to remain in force after the opening or closing, as applicable. An order entered before the open (or close) that is designated as opening only (or closing only) will likely be cancelled by the destination market after the open (or close) in accordance with its terms and therefore will not return to NASDAQ, even if not executed in full. Similarly, if NASDAQ receives a DOTI order after the security has opened (or closed) and the order has been designated to participate in the opening only (or closing only), the order will nevertheless be routed to NYSE or NYSE MKT (which may reject the order based on its designation as opening only or closing only).[7] NASDAQ is also proposing to modify the rule to provide that DOTI orders that are designated to participate in an opening process and that are received by NASDAQ before the destination market can receive them will be held until such time as the destination market can receive them.

LIST is a routing option designed to allow orders to participate in the opening and/or closing process of the primary listing market for a security, and to follow additional routing logic as described below.[8] A LIST order received before the security has opened on its primary listing market will be routed to the primary listing market for participation in that market's opening process. After the security has opened on its primary listing market, unexecuted shares will be returned to the NASDAQ system.[9] Thereafter, the order will check the System for available shares and simultaneously route the remaining shares to destinations on the System routing table. Any remaining shares will be posted on the book. As with DOT and DOTI, NASDAQ is proposing to modify the rule governing LIST orders to provide that if a LIST order is received by NASDAQ before the destination market is able to receive orders for its opening process, the order will be held until such time as the destination market can receive it.

NASDAQ is also proposing to modify the language of the rule governing LIST orders to make it clear that a LIST order may be designated to participate in the opening only, as provided by the specifications of the destination market. Accordingly, an order entered before the open that is designated as opening only will likely be cancelled by the destination market after the open in accordance with its terms and therefore will not return to NASDAQ, even if not executed in full. Similarly, if NASDAQ receives a LIST order after the security has opened and the order has been designated to participate in the opening only, the order will nevertheless be routed to the primary [sic] market (which would be expected to reject the order based on its designation as opening only).[10]

Otherwise, if an order that has not been designated as opening only [11] is entered after the market open (but before a time that is two minutes before market close),[12] NASDAQ will check Start Printed Page 18103the System for available shares and simultaneously route the remaining shares to destinations on the System routing table, with remaining shares posted on the book. Once on the book, if the order is subsequently locked or crossed by another market center, the System will not route the order to the locking or crossing market center.[13] Two minutes before market close, all LIST orders on the book will route to the security's primary listing market for participation in its closing process.[14] Similarly, if a LIST order is received at or after a time that is two minutes before market close but before market close, NASDAQ will check the System for available shares and simultaneously route the remaining shares to destinations on the System routing table; remaining shares will be routed to the security's primary listing market to participate in its closing process.[15] After the security has closed on the primary listing market, a LIST order that has not been designated as closing only and that has not been fully executed, rejected or cancelled by the destination market will be returned to NASDAQ and unexecuted shares will be posted to the NASDAQ book.[16]

NASDAQ is also modifying the language of the rule governing LIST orders to make it clear that a LIST order may be designated to participate in the closing only, as provided by the specifications of the destination market. Accordingly, an order entered before the close that is designated as closing only will likely be cancelled by the destination market after the close in accordance with its terms and therefore will not return to NASDAQ, even if not executed in full. Similarly, if NASDAQ receives a LIST order after the security has closed and the order has been designated to participate in the closing only, the order will nevertheless be routed to the primary [sic] market (which may reject the order based on its designation as closing only).[17]

Currently, any LIST order shares that are received after market close are posted to the NASDAQ book. However, NASDAQ is modifying this behavior, so that rather than posting to the NASDAQ book immediately, the order will check the System for available shares and simultaneously route the remaining shares to destinations on the System routing table. Any remaining shares will then be posted to the NASDAQ book.[18]

2. Statutory Basis

NASDAQ believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,[19] in general, and with Section 6(b)(5) of the Act [20] in particular, in that the proposal is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, 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. NASDAQ believes that the changes will increase the flexibility of market participants by making it clear that they may designate DOT, DOTI, and LIST orders to participate in the opening only or closing only of a primary listing venue, in accordance with the specifications of the primary market, and by providing that orders entered before a destination market is ready to receive them will be held by NASDAQ until they may be routed. In addition, the change with respect to LIST orders received after a market close will increase the likelihood of such order's executing, by providing that they will be routed before posting to the NASDAQ book. The changes also increase the clarity and precision of the rule text. Collectively, these changes facilitate transactions in securities and perfect the mechanism of a free and open market and a national market system by providing NASDAQ members with greater control over the routing of their orders.

B. Self-Regulatory Organization's Statement on Burden on Competition

NASDAQ does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. NASDAQ believes that the changes will promote competition by enhancing the value of NASDAQ's routing functionality to its members. However, since the use of NASDAQ's routing services is optional and members have numerous alternative mechanisms for order routing, the changes will not impair the ability of members to use other means of accessing competitive trading venues.

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)(ii) [sic] of the Act [21] and subparagraph (f)(6) of Rule 19b-4 thereunder.[22]

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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in Start Printed Page 18104furtherance 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

Paper Comments

  • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-025. 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 Web site (http://www.sec.gov/​rules/​sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASDAQ-2014-025, and should be submitted on or before April 21, 2014.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[23]

Kevin M. O'Neill,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  Formerly, NYSE Amex. NASDAQ is amending Rule 4758 to reflect the change in this exchange's name.

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4.  STGY is a routing option under which orders check the System for available shares and simultaneously route the remaining shares to destinations on the applicable System routing table. If shares remain un-executed after routing, they are posted on the NASDAQ book. Once the order is on the book, if the order is subsequently locked or crossed by another accessible market center, the System routes the order to the locking or crossing market center. SCAN behaves similarly, but once the order is on the NASDAQ book, the System will not route the order to a locking or crossing market center. Although both options are described in Rule 4758 as variations of the DOT strategy, NASDAQ's system specifications refer to the SCAN option as either “DOTA” or “DOTD” and refer to the STGY option as “DOTM.”

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5.  In the event that an opening or closing only order was returned to NASDAQ after the time of the open or close on the destination market, NASDAQ would cancel the order.

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6.  This option is referred to in system specifications as “DOTZ”.

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7.  In the event that an opening or closing only order was returned to NASDAQ after the time of the open or close on the destination market, NASDAQ would cancel the order.

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8.  NASDAQ is adding this language to the existing rule text to describe the overall framework for the routing strategy.

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9.  NASDAQ is proposing to add language to the rule to make it clear that the order would be returned only to the extent that the order has not been designated opening only and has not been fully executed, rejected, or cancelled by the destination market.

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10.  In the event that an opening only order was returned to NASDAQ after the time of the open on the destination market, NASDAQ would cancel the order.

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11.  NASDAQ is proposing to add qualifying language to the rule to make it clear that the behavior of orders after the market open would not apply to an order that has been designated as opening only.

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12.  NASDAQ is proposing to replace references to specific times, such as 4:00 p.m., in Rule 4758 with more general references to account for the possibility of variation in the precise time of NASDAQ's system hours, the time of the market open and close, and the periodic occurrence of days when the markets are planned to close early (e.g., the day after Thanksgiving).

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13.  If trading in the security is stopped across all markets, LIST orders will be sent to the primary listing market to participate in its re-opening process. When normal trading resumes, unexecuted shares will be removed from the primary listing market and posted on the NASDAQ book. LIST orders may not be assigned a time-in-force of [sic] good-till-cancelled. NASDAQ is proposing to modify the rule language governing this behavior to improve its clarity by replacing the words “cancelled off of the primary” with the words “removed from the primary listing market.”

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14.  NASDAQ is proposing to delete language stating that the routed order “will be cancelled by the System”. The language was intended to reflect the fact that the routed shares would no longer be on the NASDAQ book, but the reference to the order being “cancelled” may be confusing and therefore is being deleted.

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15.  NASDAQ notes, however, the certain trading venues have established cut-off times for participation in their opening and closing processes. Orders received by NASDAQ before the time of the opening or closing processes will be routed to the primary market; however, if a market receives such orders after its applicable cut-off time, the order may be rejected by the destination market.

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16.  NASDAQ is proposing to add language to the existing sentence regarding shares posting to the NASDAQ book to make it clear that it applies after the security has closed on the primary market and applies only if the order has not been designated as closing only and has not been fully executed, rejected, or cancelled by the destination market.

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17.  In the event that a closing only order was returned to NASDAQ after the time of the close on the destination market, NASDAQ would cancel the order.

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18.  As described above, this logic would not apply if the order was designated as closing only. NASDAQ is proposing to add language to make it clear that the routing of orders entered after market close would not apply if the order was designated as closing only.

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21.  15 U.S.C. 78s(b)(3)(a)(ii) [sic].

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22.  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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[FR Doc. 2014-07039 Filed 3-28-14; 8:45 am]

BILLING CODE 8011-01-P