NASDAQ seeks to amend price protections, paves way for new order rejection criteria

In a filing which was issued by the SEC yesterday, NASDAQ states that it proposes to amend the Order Price Protection within its options market in order to increase protection against risk.

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NASDAQ, the second-largest stock exchange in the world by market capitalization, is an executing venue with extremely strict order management and trade acceptance criteria.

Yesterday, the SEC published a notice inviting comments on the New York-based global derivatives and listed stock venue plans to amend its price protection mechanisms.

Currently, NASDAQ stipulates that when the contra side National Best Bid or Offer (NBBO) or the internal market Best Bid or Offer (BBO) is at or less than $1.00, orders with a limit more than 100% through the contra side NBBO will be rejected.

Additionally, when the contra side NBBO or the internal market BBO is greater than $1.00, orders with a limit more than 50% through the contra side NBBO will be rejected. Currently, stock legs will not trade through the underlying stock NBBO by more than $0.10 and a stock tied order to sell where the stock leg is a short sale order will not execute the stock leg at a price that does not improve the NBBO bid for the underlying issue by at least a penny, if the RegSHO short sale price test is in effect for that symbol.

In a filing which was issued by the Securities and Exchange Commission (SEC) yesterday, NASDAQ states that it proposes to amend the Order Price Protection or “OPP” within The Nasdaq Options Market LLC (“NOM”) Rules at Chapter VI, Section 18, entitled, “Risk Protections.”

The text of the proposed rule change is available on the Exchange’s Website, at the principal office of the Exchange, and at the Commission’s Public Reference Room.

In its filing with the SEC, NASDAQ included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change.

Rationale behind the amendment

According to the SEC filing, the purpose of the proposed rule change is to amend Chapter VI, Section 18, entitled, “Risk Protections.” Specifically, the Exchange proposes to amend the Order Price Protection or “OPP” functionality at Chapter VI, Section 18(a) to propose an alternative method to determine parameters for this risk protection; and memorialize certain rule text within Chapter VI, Section 18.

NASDAQ notes that OPP is intended to prevent erroneous executions of orders on NOM. This proposal seeks to further this objective by introducing a fixed dollar threshold that in combination with the existing percentage threshold will provide a modified approach to order rejection based on the price of the order.

In its current format, the OPP feature prevents certain day limit, good til cancelled or immediate or cancel orders at prices outside of certain pre-set limits from being accepted by the System. OPP applies market-wide to all options, but does not apply to market orders or Intermarket Sweep Orders. OPP is operational each trading day after the opening until the close of trading, except during trading halts.

The OPP assists Participants in controlling risk by checking each order, before it is accepted into the System, against certain parameters. Today, OPP rejects incoming orders that exceed certain parameters according to the algorithm mentioned initially in this article.

NASDAQ’s complex membership and listing criteria go hand in hand with the equally complex set of stipulations that surround executing orders on such a promient first-tier exchange, and the full documentation can be read by clicking here.

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