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Federal Register / Vol. 86, No. 208 / Monday, November 1, 2021 / Notices
security other than on the Nasdaq continuous book is either more than 0.5% or $0.01 higher than lower than the NOCP for that security as determined by the Closing Cross, whichever is greater.31 The system would resume execution of ETC Eligible Orders in a security in scenario i if and when the system determines, during the ETC, that the Nasdaq continuous book in after-hours trading is clear of resting orders in that security with a bid offer price that is higher than lower than the NOCP for that security, as determined by the Closing Cross.32 The system would resume execution of ETC Eligible Orders in a security in scenario ii if and when the after-hours trading last sale price or the best after-hours trading bid offer price of the underlying security other than on the Nasdaq continuous book returns to within the greater of the 0.5% or $0.01 thresholds during the ETC.33 If execution of ETC
Eligible Orders remains suspended as of the conclusion of the ETC, then the system would cancel any remaining unexecuted ETC Eligible Orders in that security.34
The Exchange represents that it will surveil the ETC for any unfair or manipulative trading practices.35
III. Summary of Comments and the Exchanges Response The Commission received a comment letter opposing the proposal.36 This commenter states that the Exchange has not effectively identified the purpose, use case, or client demand for the ETC,37 and expresses the concern that the ETC would diminish the quality of the Closing Cross process, encourage harmful arbitrage behavior, and negatively impact aspects of the continuous market.38

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31 See
proposed Rule 4755b3. According to the Exchange, this limitation would help to mitigate the risk that orders in Nasdaq-listed securities that participate in the ETC would execute at a price that is no longer reflective of the value of the security on trading venues other than Nasdaq. See Amendment No. 1 at 7.
32 See proposed Rule 4755b3.
33 See id.
34 See id.
35 See Amendment No. 1 at 19. As proposed, the Exchange intends to introduce the ETC and begin accepting ETC Orders during the Fourth Quarter of 2021. See id. at 14. The Exchange states that, at least 30 days prior to launching the ETC and beginning to accept ETC Orders, it would publish a Nasdaq Trader Alert announcing the launch date. See id.
36 See letter from Mehmet Kinak, Global Head of Systematic Trading & Market Structure and Jonathan Siegel, Senior Legal CounselLegislative & Regulatory Affairs, T. Rowe Price, to Vanessa Countryman, Secretary, Commission, dated August 18, 2021.
37 See id. at 1.
38 See id. This commenter also provides alternative recommendations for the closing auction. See id. at 3.

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Specifically, this commenter does not believe that the ETC would enhance the Closing Cross process, or improve price discovery or liquidity in the Closing Cross.39 Rather, this commenter believes that the ETC could detract from the Closing Cross because some market participants would withhold their interest from the Closing Cross and refrain from submitting orders until they know the NOCP.40 This, according to the commenter, would detract from the robustness and quality of the closing price.41
This commenter also believes that the ETC would allow sophisticated participants to engage in arbitrage by quickly identifying price differences between the Closing Cross price and the prevailing after-hours market price before other participants.42 According to the commenter, these sophisticated participants could use ETC-only order types and ETC imbalance information to opportunistically submit orders to engage with other participants ETC
activity at a previously determined fixed price using the ETC and unwind risk in the after-market at prices that more accurately reflect the current value of the security.43
Finally, this commenter states that the availability of information going into the closing auction becomes the principal driver of price discovery in the continuous market in the last five to ten minutes of trading.44 According to the commenter, if participants do not submit their true interest in hopes they could trade in greater size utilizing the ETC, the breadth and quality of market information could be affected and result in more uncertainty and volatility in continuous trading behavior leading into the close.45
39 See id. at 1. This commenter also distinguishes the ETC from off-exchange trading venues mechanisms that allow their participants to receive the NOCP, and states that these other mechanisms are pre-arranged matched trades or guaranteed close trades that unlike the ETC are received prior to the Closing Cross and the determination of the closing price. See id. at 2. This commenter also states that when a trade is sent to an off-exchange mechanism after the Closing Cross, it is generally a trade that is executed by a broker in a principal capacity, and these transactions tend to be clean-up trades for orders that did not complete in the auction or trades to facilitate other specific needs of a client. See id.
The commenter believes that these existing cleanup and facilitation mechanisms generally work well and does not believe there is a void that the Exchange needs to fill in this regard. See id.
40 See id. at 12.
41 See id. at 2. This commenter also expresses the concern that Commission approval of the ETC
might encourage others to offer similar functions that would likely further detract from participation and price discovery in the closing auction. See id.
42 See id. at 3.
43 See id.
44 See id.
45 See id.

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In its response letter, the Exchange disagrees with the commenters concerns that the ETC would threaten the integrity of the Closing Cross.46 The Exchange reiterates that the ETC would compete with other venues that already offer mechanisms that enable their customers to execute orders at the Closing Cross price after the Closing Cross concludes.47 The Exchange also does not believe that the ETC would siphon orders away from the Closing Cross.48 According to the Exchange, the Closing Cross is robust, efficient, and affords its participants reasonable assurance that their orders will execute, and the published indicative price and order imbalance information prior to the commencement of the Closing Cross enable its participants to mitigate their risks of participating in the Closing Cross.49 The Exchange believes that the ETC should not significantly alter the behavior of participants for which execution assurance is important,50 and that the ETC could bolster participants willingness to participate in the Closing Cross because the ETC would provide an added opportunity for their LOC
orders to execute at the Closing Cross price.51 The Exchange further states that it expects participants to use the ETC as a clean-up mechanism for executing orders that are not executed in the Closing Cross or to facilitate other specific client needs.52
46 See letter from Brett M. Kitt, Associate Vice President & Principal Associate General Counsel, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated September 9, 2021.
47 See id. at 12. While the Exchange would support a Commission review of echo prints of the Closing Cross price and their effects on market efficiency, the Exchange believes that, unless or until the Commission so acts, there is no reasonable basis to allow off-exchange venues to offer echo prints, while denying the Exchange the ability to do the same. See id. at 3.
48 See id. at 2. The Exchange states that, to the extent that it assesses that the ETC has become too large relative to the Closing Cross, or that members are indeed utilizing the ETC as a regular substitute for the Closing Cross, then it will propose such actions as are necessary to mitigate any threat to the Closing Cross or its price discovery function. See id. at 3.
49 See id. at 2.
50 The Exchange also states that, for those participants that seek to execute large volumes of shares at the Closing Cross price, exclusive participation in the ETC is unlikely to meet their needs, as ETC-only orders will execute only to the extent that there exists matching share volume in the ETC that is sufficient to do so. See id. According to the Exchange, because it would disseminate ETC
imbalance information only after the ETC
commences, participants in the ETC would have less assurance about the outcome of their participation than when they participate in the Closing Cross, or in the Closing Cross and ETC
together. See id.
51 See id.
52 See id. The Exchange also states that market forces should determine whether the market for this
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