[Federal Register Volume 79, Number 39 (Thursday, February 27, 2014)]
[Notices]
[Pages 11169-11173]
[FR Doc No: 2014-04241]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71597; File No. SR-NASDAQ-2014-004]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Amendment No. 1, and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Amend Exchange Rule 4754 Governing the NASDAQ Closing Cross

February 21, 2014.

I. Introduction

    On January 7, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Exchange Rule 4754 governing the NASDAQ
Closing Cross. The proposed rule change was published for comment in
the Federal Register on January 14, 2014.\3\ The Commission received no
comments on the proposal. On February 20, 2014, NASDAQ filed Amendment
No. 1 to the proposed rule change.\4\ This order approves the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71254 (January 8,
2014), 79 FR 2493 (``Notice'').
    \4\ In Amendment No. 1, NASDAQ amended the proposal: (i) To
clarify that an additional tie-breaker will apply to selecting the
execution price of the LULD Closing Cross (defined below); (ii) to
describe the treatment of IO orders (defined below) prior to the
determination of the execution price; (iii) to make a change the
type of information that will be disseminated during a Trading Pause
prior to the end of regular trading hours; (iv) to describe its
rationale for the time-based execution priority method currently
employed in the case of a trading halt; and, (v) to clarify that new
market orders may be entered during an LULD Trading Pause, but only
until 4:00 p.m.
---------------------------------------------------------------------------

II. Description of the Proposal

    In its filing with the Commission, the Exchange proposes to amend
Exchange Rule 4754 governing the NASDAQ Closing Cross (``Cross''),\5\
to modify the operation of the Cross to accommodate changes in market
structure triggered by Phase 2 of the National Market System Plan to
Address Extraordinary Market Volatility submitted to the Commission
pursuant to Rule 608 of Regulation NMS (``Plan'').\6\ The Exchange
proposes to create the LULD Closing Cross,\7\ which modifies the Cross
in circumstances where a Plan Trading Pause is triggered between 3:50
and 4:00 p.m. EST (``LULD Closing Cross'').
---------------------------------------------------------------------------

    \5\ ``Nasdaq Closing Cross'' shall mean the process for
determining the price at which orders shall be executed at the close
and for executing those orders. See Exchange Rule 4754.
    \6\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving,
on a Pilot Basis, the National Market System Plan To Address
Extraordinary Market Volatility).
    \7\ See proposed rule 4754(b)(6).
---------------------------------------------------------------------------

    The Plan is designed to prevent trades in individual NMS Stocks
from occurring outside of specified Price Bands.\8\ The requirements of
the Plan are coupled with Trading Pauses, or halts, to accommodate more
fundamental price moves (as opposed to erroneous trades or momentary
gaps in liquidity). The Commission approved the Plan, as amended, on a
one-year pilot basis.\9\ The Plan first became operational in April of
2013, with a staged rollout with respect to the portion of the trading
day to which the Plan applies as well as the securities subject to the
Plan. All trading centers in NMS Stocks, including both those operated
by Participants and those operated by members of Participants, are
required to establish, maintain, and enforce written policies and
procedures that are reasonably designed to comply with the requirements
specified in the Plan. The Exchange is a Participant in the Plan.
---------------------------------------------------------------------------

    \8\ Unless otherwise specified, capitalized terms used herein
are based on the defined terms of the Plan.
    \9\ See supra note 6.
---------------------------------------------------------------------------

    As currently implemented, the Plan applies to securities between
9:30 a.m. and 3:45 p.m. E.T. each trading day. In the near future, the
operation of the Plan will be extended to include the time between 3:45
p.m. and 4:00 p.m. E.T.,

which is the end of regular trading hours on the Exchange and is when
the Exchange typically conducts a Closing Cross for each of its listed
securities. The Exchange proposes to adopt rules for a LULD Closing
Cross in connection with the extension of the Plan to 4:00 p.m. E.T.
    The Exchange proposes to add new paragraph (b)(6) to Rule 4754 to
govern the operation of the LULD Closing Cross, which will apply to
Trading Pauses triggered at or after 3:50 p.m. and before 4:00 p.m.\10\
As noted by the Exchange, the LULD Closing Cross will be a hybrid
containing elements of the NASDAQ Closing Cross and the NASDAQ Halt
Cross.\11\ The five significant components to the proposed change,
described in further detail below, are: (1) Timing, (2) information
dissemination (3) participation of certain order types, (4) execution
processing, and (5) re-opening of trading following execution.
---------------------------------------------------------------------------

    \10\ See Notice, supra note 3 at 2494.
    \11\ NASDAQ Halt Cross means 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 Exchange Rule 4753(a)(3)
---------------------------------------------------------------------------

A. Timing

    For securities halted due to an LULD Trading Pause triggered
between 3:50 and 4:00 p.m., NASDAQ will conduct an LULD Closing Cross
at 4:00 p.m.\12\ For securities paused after 3:55 p.m., the Trading
Pause will be shortened to ensure a consistent close at 4:00 p.m.,
subject to limited exception in the case of extreme volatility
described below.\13\ Consistent with the Closing Cross, if at 4:00 p.m.
there is insufficient trading interest in the NASDAQ system to execute
an LULD Closing Cross,\14\ NASDAQ will not conduct an LULD Closing
Cross in that security.\15\ In that case, NASDAQ shall instead use the
last sale on NASDAQ as the NASDAQ Official Closing Price (defined in
the Exchange's rules) in that security for that trading day, as it does
when there is insufficient interest in the Closing Cross.\16\
---------------------------------------------------------------------------

    \12\ The LULD Closing Cross will not apply for any security
halted by an LULD Trading Pause triggered prior to 3:50 p.m.
Specifically, if an LULD Trading Pause is triggered at 3:49:59 and
ends at 3:54:59, the stock will open via the standard NASDAQ Halt
Cross as specified in the rules toady and then close via the
standard NASDAQ Closing Cross at 4:00 p.m. See id.
    \13\ See id.
    \14\ Insufficient trading interest is defined as the lack of any
bid interest priced to be marketable against any available offer
interest. For example, if the most aggressively priced bid interest
is priced at $1.00 and the most aggressively priced offer interest
is priced at $5.00, there is insufficient trading interest to
execute an LULD Closing Cross. See id.
    \15\ See proposed rule 4754(b)(6)(A)(ii).
    \16\ See Notice supra note 3 at 2494.
---------------------------------------------------------------------------

    According to the Exchange, NASDAQ will delay execution of the LULD
Closing Cross if the market experiences volatility during the Trading
Pause just prior to the time of execution.\17\ Specifically, the
Exchange notes that if the expected closing price changes more than
five percent, or 50 cents, whichever is greater, in the last 15 seconds
of the Trading Pause, or if there is a market order imbalance (e.g.,
there is a greater quantity of shares to buy priced as market orders
than total eligible sell interest) preventing the calculation of a
cross price, NASDAQ will delay the execution of the LULD Closing
Cross.\18\ In that case, the LULD Closing Cross will be extended in
one-minute increments until such time as sufficient trading interest
does exist, the volatility condition is eliminated, and/or the market
order imbalance has been eliminated.\19\ The above volatility checks
will be governed under Rule 4120(c)(7)(C)(1) and 4120(c)(7)(C)(3). If
this condition persists until 5:00 p.m., NASDAQ will not conduct an
LULD Closing Cross in that security and shall instead use the last-sale
on NASDAQ as the NASDAQ Official Closing Price in that security for
that trading day.\20\ As noted by the Exchange, in the event that the
volatility condition persists until 5:00 p.m., all orders will be
cancelled back to the entering firms, and after hours trading will
begin at 5:00 p.m.\21\
---------------------------------------------------------------------------

    \17\ See id.
    \18\ See id.
    \19\ See id.
    \20\ See proposed rule 4754(b)(6)(A)(iii).
    \21\ See Notice supra note 3 at 2494.
---------------------------------------------------------------------------

B. Information Dissemination

    The change in timing, referenced above, also changes how the
Exchange will disseminate the Net Order Imbalance Indicator (``NOII'').
According to the Exchange, NASDAQ disseminates the NOII every five
seconds from 3:50 p.m. until the close of trading at 4:00 p.m., and it
will continue to do so under this proposal.\22\ If the LULD Closing
Cross is extended beyond 4:00 p.m. due to late volatility or a market
order imbalance, NASDAQ will continue to disseminate the NOII every
five seconds until the LULD Closing Cross actually occurs or until 5:00
p.m.\23\
---------------------------------------------------------------------------

    \22\ See id.
    \23\ See id.
---------------------------------------------------------------------------

    The Exchange notes that NOII message during the Trading Pause
preceding an LULD Closing Cross will be similar to those disseminated
during a standard closing Cross and other halt crosses.\24\
Specifically, the Near Clearing Price,\25\ Far Clearing Price,\26\ and
Current Reference Price \27\ contained in the NOII will all represent
the price at which the LULD Closing Cross would execute should the
Cross conclude at that time.\28\ The Exchange originally proposed that
the NOII would also include the size and side of any shares not
currently paired at the Reference Price. Amendment No. 1 proposes to
change this provision by requiring dissemination of an indicator for
``market buy'' or ``market sell'' if marketable buy or sell shares
would remain unexecuted above or below the Near or Far Clearing Price
for the expected LULD Closing Cross, rather than disclosing the size
and side of order imbalances, which is consistent with what is
currently done in the NASDAQ Halt and IPO Crosses.\29\ The Exchange
stated this language conforms to the dissemination of indicative
pricing information currently set forth in Exchange Rule
4753(a)(2)(E)(iii) and 4754(a)(7)(E)(ii) governing the NASDAQ Halt/IPO
Cross and the NASDAQ Closing Cross.\30\
---------------------------------------------------------------------------

    \24\ See id.
    \25\ Far Clearing Price means the price at which both the MOC,
LOC, and IO, orders would execute. See Exchange Rule
4754(a)(7)(E)(i).
    \26\ Near Clearing Price means the price at which the MOC, LOC,
IO, and Eligible Interest would execute. See Exchange Rule
4754(a)(7)(E)(ii).
    \27\ Current Reference Price means: (i) The single price that is
at or within the current Nasdaq Market Center best bid and offer at
which the maximum number of shares of MOC, LOC, IO and Close
Eligible Interest can be paired; (ii) If more than one price exists
under subparagraph (i), the Current Reference Price shall mean the
price that minimizes any Imbalance; (iii) If more than one price
exists under subparagraph (ii), the Current Reference Price shall
mean the entered price at which shares will remain unexecuted in the
cross; (iv) If more than one price exists under subparagraph (iii),
the Current Reference Price shall mean the price that minimizes the
distance from the bid-ask midpoint of the inside quotation
prevailing at the time of the order imbalance indicator
dissemination. See Exchange Rule 4754(a)(7)(A).
    \28\ See Notice supra note 3 at 2494.
    \29\ See Amendment No. 1 to the proposal, supra note 4.
    \30\ Id.
---------------------------------------------------------------------------

C. Participation of Order Types

    The Exchange notes that currently, two sets of orders can
participate in the Closing Cross: (1) Orders resting on NASDAQ's
continuous book at the time of the Cross, and (2) any ``Special Closing
Order'' entered and not cancelled prior to the close.\31\ Special
Closing Orders, as set forth in NASDAQ Rule 4754, are Market on Close
(``MOC''), Limit on Close, (``LOC''), and Imbalance Only (``IO'')
orders. Under this proposal, the LULD Closing Cross would include
Special Closing Orders,

newly entered orders, and all orders resting on the continuous
book.\32\
---------------------------------------------------------------------------

    \31\ See Notice supra note 3 at 2494.
    \32\ See id.
---------------------------------------------------------------------------

    In the event of an LULD Closing Cross, MOC, LOC and IO intended for
the closing cross entered into the system and placed on the book prior
to 3:50 p.m. will remain on the book to participate in the LULD Closing
Cross and may not be modified or cancelled.\33\ Currently, under Rule
4754, MOC and LOC orders can be cancelled between 3:50:00 p.m. and
3:55:00 p.m. only by requesting NASDAQ to correct a legitimate error
(e.g., side, size, symbol, price or duplication of an order).\34\ In
addition, currently, MOC and LOC orders cannot be cancelled after
3:55:00 p.m. for any reason.\35\
---------------------------------------------------------------------------

    \33\ See proposed rule 4754(b)(6)(C)(i).
    \34\ See Exchange Rule 4754(a)(4) and (5).
    \35\ See id.
---------------------------------------------------------------------------

    The Exchange notes that under the proposal, members will be
permitted to enter and modify (only to increase the number of shares
represented), but not cancel new IO orders up to the time of execution
of the LULD Closing Cross.\36\ In the original filing, NASDAQ described
the treatment of IO Orders after the system determines the execution
price of the LULD Closing Cross. However, NASDAQ neglected to describe
their treatment prior to that determination, and their impact on the
execution price. Specifically, in the case of an LULD Trading Pause
prior to the close of trading, prior to the determination of the
execution price, IO Orders entered prior to the LULD Closing Cross will
be re-priced to one penny above the LULD band price (for sell IOs) or
one penny below the LULD price band (for buy IOs) or to the entered
price if it is less aggressive than the LULD price band at the time of
the LULD Trading Pause.\37\
---------------------------------------------------------------------------

    \36\ See Notice supra note 3 at 2495. See also proposed rule
4754(b)(6)(C)(iii).
    \37\ See Amendment No. 1 to the proposal, supra note 4.
---------------------------------------------------------------------------

    With respect to continuous book orders resting on the book at the
time of the Trading Pause, all such orders eligible to participate in
the Cross will remain on the book to participate in the LULD Closing
Cross and such orders may be modified or cancelled up until the time
the LULD Closing Cross.\38\ The Exchange notes that all order times in
force eligible to participate in the Cross today will continue to do so
in the proposed LULD Closing Cross.\39\
---------------------------------------------------------------------------

    \38\ See proposed rule 4754(b)(6)(C)(ii).
    \39\ Those orders include the following Time In Force markings:
Market Hours Good-till-Cancelled (``MGTC''), Market Hours Day
(``MDAY''), System Hours Expire Time (``SHEX''), System Hours Day
(``SDAY''), System Hours Good-till-Cancelled (``SGTC''), or Good-
til-Market Close ``GTMC''). See Notice supra note 3 at 2495.
---------------------------------------------------------------------------

    NASDAQ also proposes to permit the entry, modification, and
cancellation of additional orders (whether market or limit orders)
during the Trading Pause. Specifically, during a Trading Pause that is
triggered or extended after 3:50 p.m., members will be permitted to
enter, modify, and cancel new market orders up until 4:00 p.m. The
Exchange notes that it does not currently permit the entry of market
orders after 4:00 p.m.; only limit orders may be entered after 4:00
p.m. Therefore, if an LULD Trading Pause is extended beyond 4:00 p.m.
due to continuing volatility, entry of new market orders will be
prohibited after 4:00 p.m. Limit orders may still be entered up to the
time of execution of the LULD Closing Cross.\40\ New orders of any
order type or any time in force described in NASDAQ Rule 4751 will be
eligible to participate in the LULD Closing Cross.\41\ Any new order
entered between 3:50 and 4:00 p.m. that is not executed in the LULD
Closing Cross shall be processed after the LULD Closing Cross is
executed according to the entering firm's instructions on that
order.\42\
---------------------------------------------------------------------------

    \40\ See Amendment No. 1 to the proposal, supra note 4 and
proposed rule 4754(b)(6)(C)(iii).
    \41\ See Notice, supra note 3 at 2495.
    \42\ See id.
---------------------------------------------------------------------------

D. Execution Processing

    The Exchange will determine the closing price by taking the closing
book (MOC and LOC orders only), the remaining eligible orders on the
book prior to the LULD halt, and any new interest entered after the
LULD halt.\43\ The Exchange notes that priority in the cross will be
price/time, with IO orders more aggressive than the closing price re-
priced to the closing price but retaining their original time
priority.\44\ The Exchange states that the execution algorithm for the
LULD Closing Cross shall be the same as currently used for the
Cross.\45\ Specifically,
---------------------------------------------------------------------------

    \43\ See id.
    \44\ See id.
    \45\ See id.
---------------------------------------------------------------------------

    (A) The Nasdaq Closing Cross will occur at the price that maximizes
the number of shares of Eligible Interest in the Nasdaq Market Center
to be executed;
    (B) If more than one price exists under subparagraph (A), the
Nasdaq Closing Cross shall occur at the price that minimizes any
Imbalance;
    (C) If more than one price exists under subparagraph (B), the
Nasdaq Closing Cross shall occur at the entered price at which shares
will remain unexecuted in the cross.
    (D) If more than one price exists under subparagraph (C), the
Nasdaq Closing Cross shall occur at:
    i. In the case where a security has already traded during normal
market hours on that trading day, the price that is closest to the last
Nasdaq execution prior to the Trading Pause;
    ii. In the case where a security has not already traded during
normal market hours on that trading day, the price that is closest to
the previous NASDAQ Official Closing Price.\46\
---------------------------------------------------------------------------

    \46\ See Notice, supra note 3 at 2495; Amendment No. 1, supra
note 4. The Exchange notes that this fourth tie-breaker would be
used rarely but that when it is used this tie-breaker must be based
on a fixed reference prices such as the last reported trade. This
fixed tie-breaker, according to the Exchange, is superior to a
floating one, such as midpoint or an NBBO, in situations where there
is no continuous market just prior to the execution of the cross, as
is the case prior to any halt. Id.
---------------------------------------------------------------------------

    Once the algorithm determines the proper closing price, the LULD
Closing Cross will execute all orders at the determined price in strict
price/time priority, rather than the complex priority currently set
forth in NASDAQ Rule 4754(b)(3).\47\ The Exchange notes that it
selected the time-based priority method currently employed in the case
of a trading halt rather than the more complex method used in the case
of a standard closing cross because it believes that trading behavior
during an LULD Trading Pause immediately prior to the close of trading
will more closely resemble behavior during a trading halt than trading
just prior to the close.\48\ This is likely to be the case due to the
absence of a continuous market during the LULD Trading Pause, as
opposed to the presence of a continuous market just prior to the
standard close of trading.\49\
---------------------------------------------------------------------------

    \47\ See Notice, supra note 3 at 2495.
    \48\ See Amendment No. 1, supra note 4.
    \49\ See id.
---------------------------------------------------------------------------

    According to the Exchange, excess interest at the closing price
will be available for execution against available IO orders on the
opposite side of the market.\50\ Aggressive IO orders opposite the side
of the imbalance that were entered prior to other orders at exactly the
crossing price will be re-priced to the crossing price and have
priority over those orders.\51\ The LULD Closing Cross price will be
the NASDAQ Official Closing Price for stocks that participate in the
LULD Closing Cross.
---------------------------------------------------------------------------

    \50\ See Notice, supra note 3 at 2495.
    \51\ This treatment of IO orders differs slightly from the
current closing cross where aggressive IO Orders may be re-priced to
either the best bid or offer in order to interact only with MOC and
LOC interest. See id.
---------------------------------------------------------------------------

E. Re-Opening Trading

    After hours trading will begin immediately following execution of
the

LULD Closing Cross. According to the Exchange, at that time, all
resting orders or newly entered orders not executed in the LULD Closing
Cross will be either cancelled or available for execution in after-
hours trading based on the entering firm's instruction on the
order.\52\
---------------------------------------------------------------------------

    \52\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposal, as modified by Amendment No.
1, the Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities exchange.\53\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\54\ which requires, among
other things, that the rules of an exchange be designed to promote just
and equitable principles of trade, remove impediments to, and perfect
the mechanism of, a free and open market and a national market system,
and, in general, protect investors and the public.
---------------------------------------------------------------------------

    \53\ In approving the proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \54\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Exchange notes that all aspects of the proposed LULD Closing
Cross are based upon existing processes built into both the Exchanges'
Closing Cross and Halt Cross. Consistent with existing processes, the
Exchange will accept all orders resting on NASDAQ's continuous book at
the time of the LULD Closing Cross, including newly entered orders, and
any Special Closing Order, defined as a MOC, LOC, or IO order. Priority
in the LULD Closing Cross will be price/time, with IO orders more
aggressive than the closing price re-priced to the closing price but
retaining their original time priority. The execution algorithm for the
LULD Closing Cross shall be the same as currently used for the NASDAQ
Closing Cross. Once the algorithm determines the proper closing price,
the LULD Closing Cross will execute all orders at the determined price
in strict price/time priority, rather than the complex priority
currently set forth in NASDAQ Rule 4754(b)(3).\55\ Additionally, the
Exchange will continue to disseminate the similar market data
information for the LULD Closing Cross as it does with the IPO Cross
and Halt Cross, which the Exchange notes is designed to facilitate the
entry of additional offsetting interest in the closing process.\56\
---------------------------------------------------------------------------

    \55\ See proposed rule 4754(b)(6)(D) and Notice, supra note 3 at
2495. As the Exchange noted further, it selected the time-based
priority method currently employed in the case of a trading halt
rather than the more complex method used in the case of a standard
closing cross because it believes that trading behavior during an
LULD Trading Pause immediately prior to the close of trading will
more closely resemble behavior during a trading halt than trading
just prior to the close. See Amendment No. 1, supra note 4.
    \56\ See Notice, supra note 3 at 2494.
---------------------------------------------------------------------------

    The Exchange notes that it attempted to mitigate the risks
associated with a Trading Pause that occurs near the end of regular
trading hours to the greatest extent possible.\57\ The Exchanges stated
that it believes that this proposal is consistent with the Act and that
the proposal is designed to preserve to the extent possible current
order entry and trading behaviors, thereby reducing the potential for
member and investor confusion.\58\ The Exchange further stated that it
believes this proposal is well-tailored to provide transparency and
predictability by clearly defining when the LULD Closing Cross will
occur, what orders will be included, what information will be
disseminated, how the execution algorithm will operate, and when after-
hours trading will begin.\59\ Specifically the Exchange stated that it
believes that maintaining the 4:00 p.m. market closing time is the
approach most likely to result in a fair and orderly market at the
close of trading.\60\
---------------------------------------------------------------------------

    \57\ See id. at 2496.
    \58\ See id. at 2495.
    \59\ See id. at 2496.
    \60\ See id. at 2494.
---------------------------------------------------------------------------

    Regarding the proposed rule change in Amendment No. 1 concerning
the treatment of IO orders, the Exchanges notes that, consistent with
IO orders in the Cross, the purpose of IO orders in the LULD Closing
Cross is to aid in the price discovery process and provide a
stabilizing mechanism, which in a time of greater market volatility
becomes all the more important.\61\ As noted by the Exchange, in the
standard Cross, IO orders are re-priced to a reference price that is
the NASDAQ best bid for buys or the NASDAQ best offer for sells.\62\
Without a bid or offer based on continuous trading due to the LULD
Trading Pause, the LULD band price becomes a substitute reference price
for the LULD Closing Cross IO Orders.\63\ Additionally, buy and sell IO
orders are not meant to trade against each other or cause imbalances
and thus the IO orders in a LULD Closing Cross will be re-priced to
$0.01 below the LULD band for buys and $0.01 above the LULD band for
sells.\64\
---------------------------------------------------------------------------

    \61\ See Amendment No. 1, supra note 4.
    \62\ See id.
    \63\ See id.
    \64\ See id.
---------------------------------------------------------------------------

    Due to the likelihood of increased volatility after an LULD pause
and the importance of orderly trading at the close, NASDAQ has
determined to treat IO Orders differently in this circumstance.\65\
NASDAQ believes that this treatment of IO Orders is appropriate and
beneficial to investors and the market because, by definition, an LULD
pause follows a period of unusual volatility and an LULD pause at the
close of trading poses risks at a particularly important time of the
trading day.\66\ Using the LULD band as the reference price upon which
to base IO Order prices will foster stability in an otherwise unstable
time in the market. NASDAQ considered various alternatives for the re-
pricing of IO Orders, ranging from re-pricing at the LULD bands, at one
penny away from those bands, and at multiple pennies away. NASDAQ
believes that re-pricing at a penny away from the LULD bands properly
balances the need for a buffer to protect investors from excessive
volatility (which would militate towards a narrower banding) and the
need for unfettered price discovery (which would push towards wider
banding). This balance, in NASDAQ's view, is the best way to protect
investors and maintain a fair and orderly market.
---------------------------------------------------------------------------

    \65\ See id.
    \66\ See id.
---------------------------------------------------------------------------

    Regarding the decision to prevent the cancellation or modification
of previously entered MOC and LOC orders, the Exchange notes that the
proposal is designed to promote stability and predictability in the
orders that are entered for the close, rather than having last-minute
cancellations of ``on close'' orders which would cause continual
changes to the order balance in a security near the end of trading.\67\
The Exchange further notes that Members are not required to enter such
orders in the first place. The Exchange considered permitting members
to cancel or modify previously entered MOC and LOC Orders, but decided
not to for several reasons. First, the Exchange notes that members that
participate in NASDAQ's Closing Cross rely on the fixed status of MOC
and LOC Orders to anchor the crosses; the benefits of stability apply
with equal force to the LULD Closing Cross.\68\ Second, the Exchange
notes that there is a benefit to maintaining the same behavior of
specific order types to the greatest extent possible; changing the
behavior of order types could create member confusion.\69\ Lastly, the

Exchange notes that members that enter MOC and LOC orders are and will
continue to be fully aware of the risk of price movements at the close,
including the risk of an LULD Trading Pause and that members can avoid
that risk by changing their behavior and entering other order types if
they deem the risk to be too large.\70\ The Exchange concluded that the
better course is to prevent the cancellation or modification of MOC and
LOC Orders to the same extent as currently allowed on the Exchange.\71\
---------------------------------------------------------------------------

    \67\ See Notice, supra note 3 at 2496.
    \68\ See id. at 2495.
    \69\ See id.
    \70\ See id.
    \71\ See id.
---------------------------------------------------------------------------

    As explained above, the Exchange has proposed certain price and
execution constraints for the LULD Closing Cross to ensure that the
auction occurs at a price that is based on rational and current market
conditions.\72\ Specifically, NASDAQ stated that it believes that the
proposed price check for movement of five percent or 50 cents,
whichever is greater, in the last 15 seconds of an LULD Trading Pause
is prudent in light of the volatility that stocks are, by definition,
experiencing at the time of the LULD Trading Pause.\73\ Additionally,
the Exchange retains discretion under Rule 4754(b)(6)(A)(iii) to extend
the timing of the LULD Closing Cross if an order imbalance exists at
the time designated for the LULD Closing Cross to occur, up to 5:00
p.m. The Exchange states that 5:00 p.m. is a reasonable time to end
such volatility extensions and cancel the closing cross because as
volatility in a security continues towards 5:00 p.m., the likelihood of
a smooth LULD Closing Cross diminishes.\74\ The Exchange notes that
while it is prudent to extend the time for executing the closing cross
rather than risk a volatile close, the extension must be balanced by
the need for closure.\75\ NASDAQ represents that the 5:00 p.m. cut-off
time represents a reasonable balance.\76\
---------------------------------------------------------------------------

    \72\ See supra notes 41-47, and accompanying text.
    \73\ See Notice, supra note 3 at 2494.
    \74\ See Notice, supra note 3 at 2494.
    \75\ See id.
    \76\ See id.
---------------------------------------------------------------------------

    For the various reasons noted above, the Commission finds that the
proposed rule change as modified by Amendment No. 1 is consistent with
the Act, including Section 6(b)(5) of the Act,\77\ which requires,
among other things, that the rules of an exchange be designed to
promote just and equitable principles of trade, remove impediments to,
and perfect the mechanism of, a free and open market and a national
market system, and, in general, protect investors and the public.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Commission finds good cause to approve the filing, as modified
by Amendment No. 1 to the proposed rule change, prior to the thirtieth
day after the date of the publication of notice of the filing thereof
in the Federal Register. The proposed revisions should further enhance
the Exchange's policies and procedures with respect to the operation of
the Plan. Accelerated approval would allow the Exchange to update its
rule text immediately, thus providing users with greater clarity and
certainty with respect to the use of the new LULD Closing Cross
functionality offered by the Exchange in anticipation of the
application of the Plan through the end of regular trading Hours.
Accordingly, the Commission finds that good cause exists, consistent
with Section 6(b)(5) of the Act, to approve the filing, as modified by
Amendment No. 1, on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
is consistent with the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-NASDAQ-2014-004 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-004. 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 on official business
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for inspection and copying at the
principal offices 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-2014-004, and should be submitted on or before
March 20, 2014.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\78\ that the proposed rule change, SR-NASDAQ-2014-004, as modified
by amendment No. 1, be, and hereby is, approved on an accelerated
basis.
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\79\
---------------------------------------------------------------------------

    \79\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04241 Filed 2-26-14; 8:45 am]
BILLING CODE 8011-01-P